India peers into its digital future

By on 27/09/2018 | Updated on 04/02/2022
With over 500 million mobile phone users, India is putting technology at the heart of interactions with government and the finance sector (Image courtesy: Stefano Ravalli/Flickr).

This week, India’s Supreme Court allowed the country’s ambitious Aadhaar ID scheme to proceed, whilst setting down rules to protect people’s rights and privacy. Gavin O’Toole finds that the ruling offers mixed blessings for a digital agenda whose ambition and pace have long outgrown its infrastructure and policy frameworks

India’s vast ‘Aadhaar’ personal identity system has just won the backing of the country’s top court, in a major judgment which clears a path forward for prime minister Narendra Modi’s ground-breaking project. But the ruling also lays down boundaries around the scheme’s ambitions – setting out rules designed to protect citizens’ rights and privacy.

On Wednesday India’s Supreme Court upheld the system’s legality, finding that the government’s Aadhaar Act “is a beneficial legislation which is aimed at empowering millions of people in this country.”

“At the same time, data protection and data safety is also to be ensured to avoid even the remote possibility of data profiling or data leakage,” the court said – adding strictures barring private businesses from requiring Aadhaar numbers before providing services such as bank accounts and mobile phone connections.

Aadhaar is a key plank of Modi’s modernising vision, encapsulated in his ambitious “Digital India” campaign – which was launched in 2015, and aims to make government services available online. Using each citizen’s 12-digit social security number, authenticated by biometric scans and fingerprints, Aadhaar provides a common identity system that people can use to claim benefits, file tax returns, open bank accounts and transfer funds. The technology is already being used to increase uptake and attack corruption in the distribution of subsidies, and the government hopes to use it to manage access to public services such as its free healthcare scheme.

Seeking clarity

Campaigners, concerned about privacy, data security and individuals’ rights, have attempted to block the project. Its opponents have pointed out that personal data stored in the world’s largest biometric database has been offered for sale online, and in January courts started hearing 27 cases challenging the system’s legality – many of them built around charges that the database violates citizens’ privacy.

The judges’ 567-page ruling permits the government to require Aadhaar IDs for those accessing public services – such as benefits, online tax platforms and subsidies – but insists that participation should be voluntary when citizens interact with private businesses. Whilst the judgment may slow the government’s drive towards a digital economy, it is also likely to help crystalise the way forward.

For whilst the government’s digital ambitions are huge and its pace impressive, the agenda has suffered from a lack of policy capacity and focus at the centre. “In terms of scale, India’s digitisation effort has been huge – but at the policy level a lot of clarity is still needed and there are lots of missing elements,” Madhu Sivaraman, research and projects director at leading Indian think tank the Centre for Public Policy Research (CPPR), told Global Government Forum earlier this year. “There are two real issues: the infrastructure has been really poor; and we still do not have a policy to tackle many of the problems caused by digitisation, especially on data protection and security.”

Demonetisation took 86% of India’s currency out of circulation (Image courtesy: Ishant Mishra/Unsplash).

Modi’s digital vision

The ruling is likely to provide direction and impetus for many of those policy issues, catalysing action to address the infrastructure and regulatory challenges increasingly exposed by the rapid development of India’s digital economy. Uptake of digital services is growing rapidly – as noted by the Digital Evolution Index 2017, compiled by Tufts University and Mastercard – and investment banker Credit Suisse has projected that India’s digital payments could be worth $1 trillion (£750m, €857m) by 2023.

The government’s National Payment Corporation of India (NPCI) has been tasked with encouraging banks to digitise, working with Aadhar’s administrators the Unique Identification Authority of India (UIDAI). The NPCI’s Unified Payment Interface (UPI), operating through apps such as BHIM, enables e-payments directly through banks and has been embraced by diverse economic sectors – from stockbroking to insurance. “What India has done very beautifully is that it has linked the social security number to the authentication of an individual’s identity through biometrics or a mobile password,” comments Sachin Seth, a partner working on financial advisory, digital, fintech and innovation at EY India. This permits the country to “modernise its payments as well as its social security systems.”

Building on the rapid uptake of mobile phones in India – projections suggest smartphone users in the country could number 530 million this year – the UPI has attracted global tech and social media firms such as Google Tez, PayPal and Amazon Pay to the payments market, and created new opportunities for mobile platforms.

Stripped for cash

One landmark moment was ‘demonetisation’ in late 2016, when the government abruptly withdrew from circulation 500-rupee ($6.90) and 1,000-rupee ($13.80) bills – making 86% of India’s currency invalid overnight. The policy was criticised for its execution, and bruised the economy – GDP growth dipped – but gave a huge boost to transactions through the UPI. The NPCI reported more than 190 million UPI transactions in April alone, worth over £3 billion, and India’s government has asked banks and mobile wallet companies to achieve 30 billion digital transactions this fiscal year.

In part, both Aadhaar and the demonetisation agenda reflect the government’s goal of pushing more of the country’s vast black economy into the formal sector. Cash still accounts for 90% of transactions: Shilan Shah, senior India economist at the consultancy Capital Economics, points out that “the move towards a more digital economy encourages more payments to be made through official means – for instance through the banking system – which should help to boost the size of the formal economy and ultimately broaden the tax base.”

Since its launch in 2017, India’s Goods and Services Tax (GST) has been IT-enabled so that businesses can file returns online. While there is no obligation to pay direct income and corporation taxes online, demonetisation led to a 25% increase in people filing tax returns.

In India cash is still king, accounting for 90% of all transactions (Image courtesy: Igor Ovsyannykov/Unsplash).

Reaching the right people

Just as importantly, digitisation enables the government to target subsidy payments while reducing fraudulent claims and corruption. Suyash Rai, a senior consultant at the National Institute of Public Finance and Policy (NIPFP) in New Delhi, says: “For a government with a lot of expenditures – subsidies, salaries, pensions, procurement – it is important to be able to do as much of this as possible through some mechanism which reduces leakage and makes it difficult for people to pilfer. That in turn necessitates a degree of digitisation at both ends – government and recipient.” 

In March, the government estimated that being able to transfer gas, kerosene and food subsidies directly to the bank accounts of targeted social groups had saved it R830 billion ($11bn or £9bn) since its direct benefit transfer (DBT) scheme was launched in 2013.

Another potent benefit of digitisation has been to support wider efforts to broaden financial inclusion, enabling previously excluded citizens to open bank accounts and thereby gain access to credit, remittances, insurance and pensions. Financial inclusion has been one of Modi’s policy priorities, and more than 300 million new accounts have been created.

Digitalisation aims to reduce the use of cash as part of a wider policy to formalise the economy (Image courtesy: Igor Ovsyannykov/Unsplash).

A policy for infrastructure

Key to this inclusion agenda is expanding India’s infrastructure. Many millions lack access to reliable electricity, let alone mobile phones, broadband and wifi. Just one third of the population have access to the internet, and the Digital Evolution Index 2017 identifies a “mobile internet gap” affecting rural areas – where mobile internet penetration is just 18%.

Madhu Sivaraman of the CPPR notes that Delhi has struggled to mobilise the 28 state governments behind its infrastructure plans. “Big ambitions have been put in place, but at the state level the infrastructure has been very poor,” he says. “When the centre has been trying to provide the vision, most of India’s states have been really poor at implementing it.”

A shortage of capacity to oversee regulatory and policy issues at the centre of government has also slowed progress. Whilst the prime minister’s office has provided the drive behind digitisation, it lacks the manpower and specialist skills to manage delivery across the agenda – and commentaters suggest the government’s approach has suffered from incoherence and ambiguities in the chain of command. It was not until mid-2016 that a Ministry of Electronics and Information Technology was created, working alongside existing bodies such as the NPCI, UIDAI, the Reserve Bank of India and the Ministry of Finance.

An infrastructure for policy

“If you look at the way in which policy institutions have responded to digital issues it has not been proactive at all, and there has been a lack of coordinated attempts at driving policy,” says Sivaraman of the CPPR. Look at the issue of data privacy, he adds: “All the data initiatives that have taken place share the specific gap of who is going to regulate or who is going to monitor data issues or leakages.” These omissions may, in the shape of this week’s court judgment, now have come home to roost.

“It’s not been a particularly coherent policy, and maybe making things a bit more coherent would have helped – a lot of the so called benefits from demonetisation, for example, were only claimed in hindsight,” agrees Shilan Shah of Capital Economics.

In particular, says Suyash Rai of the NIPFP, the government should tweak regulations to ensure that innovators and entrepreneurs can enter the market and compete against established players. “Our bank-centred approach to finance – where the bank is at the centre of the system, and the regulator will say if you want to do anything you have to go through a bank – really stifles innovation,” he warns.

India’s biggest wholesale market in New Delhi is a vibrant example of the dynamism of its economy (Image courtesy: Raghu Nayyar/Unsplash).

An ambitious agenda

Despite these problems, India’s drive for digital infrastructure, identities and payments systems has huge potential – not just to improve the reach and efficiency of public services, but as the basis for a fast-growing digital economy. The new ruling looks set to constrain the government’s ambitions; but it may also push it into building a more robust regulatory and policy framework, giving the agenda firmer foundations.

Shilan Shah of Capital Economics points out that, whilst it develops its digital policies, there is still plenty of room for the government to reach out to the hundreds of millions who live largely outside the world of 21st century technologies. “Only about 1% of the population actually pay income tax, mainly because vast parts of the economy are still informal – and so encouraging people to pay income tax in the first place would be the first step before you start worrying about whether it’s online or not,” he suggests.

Meanwhile, India’s informal economy – robust, chaotic, entrepreneurial – powers on. Despite ‘demonetisation’, the country’s appetite for cash remains huge: central bank data suggests that the amount of cash in circulation as a proportion of GDP could soon be back to pre-demonetisation levels. “The debate has been about whether it is going to be a cashless economy or a ‘less cash’ economy,” says Sachin Seth of EY. “It is turning out to be a ‘less cash’ economy.”

About Gavin O’Toole

Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.

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