By Abhishek Gaurav

Edited by Shambavi Singh, Associate Editor, The Indian Economist

Aadhar is one of the most elaborate policies conceived by the Government of India in February 2009 to address the problems of financial inclusion in the country. Identity verification, duplication and authentication are some issues that have historically disrupted the pace of financial inclusion in India. Under the program, the residents of the country are to be provided a unique twelve digit identification number on a smartcard with a microprocessor chip with the personal identifiable information and the biometrics also engraved on the same chip. The program is being implemented by the nodal agency of Unique Identification Authority of India (UIDAI). Aadhar Card scheme seeks to leverage the big breakthrough in financial usage pattern of decreasing prevalence of cash for debit-credit settlements in lieu of the technology enabled services.

The primary reason to launch such a scheme was to channel all the state linked disbursements via a single window, while also providing a digital, online and verifiable identity on a common platform, to all the residents of the country. A performance evaluation report of the Planning Commission estimated that the government spends Rs. 3.65 for every 1 rupee worth benefits received by the beneficiaries (PEO 2005). By creating unique identification channel for such beneficiaries, the government hoped to plug the leakages associated with the mega public welfare schemes. The scheme would have also given a huge impetus to the financial inclusiveness agenda of the government given that the Aadhar number can serve as a robust KYC identification framework. Biometric authentication provides an added functionality of de-duplication at the time of transaction for which the general practice had been to use signatures, PIN or passwords.

Though Aadhar has helped to solve the fundamental problems of identity and duplication issues, it does not significantly address the last mile delivery problem of comprehensive financial services. It stops just short of elaborating the concept of financial inclusion intended and articulating the financial products that should be made available in order to achieve that inclusion. Given that the coverage of local banking units in the country is still low, UIDAI suggested setting up micro-ATMs to facilitate cash transactions with ease. Such micro-ATMs were to be neither human nor machines, but were designed to incorporate a human interface similar to a Business Correspondent (BC) who could work as a teller and assist the individual in authentication procedures. However, the associated costs are huge – about Rs 20 per transaction which is a substantial amount for small money owners. Various agencies have also cited data security issues and issuance of fake UID cards on account of technical lapses. The scheme of providing a unique number to every resident can prove counterproductive for the government in the north eastern parts of the country where it is still rattled by problems of illegal immigration and infiltration. Also, the mechanism of biometrics to authenticate bank account holders may not be fully adequate, as most of the program participants are engaged in intensive manual labour which creates problems in fingerprint matching.

As of March 2014, Supreme Court in a hearing has categorically stated that the Aadhar card cannot be made mandatory to collect welfare subsidies or avail public services of the state, citing it as an intrusion into the privacy of the citizens. This takes away the legal backing of the program. However, the current NDA government has financial inclusion as a key agenda of its manifesto. The Prime Minister has already launched the flagship program ‘Jan Dhan

Yojna’ to initiate bank account openings on an unprecedented scale. He has also reviewed the Aadhar card scheme and given his nod for the fifth phase implementation of the program. An Aadhar Card for all by June’15 has been declared as a target. However, a clear framework of integrating Aadhar Card Scheme with the larger goals of financial inclusion and addressing its bigger challenges is still not there.

Abhishek Gaurav is a B.S. – M.S. dual degree student in Economics at IIT Kanpur. He has a prior experience with the development economics centric research arm of MIT, Abdul Latif Jameel Poverty Action Lab (J-PAL), primarily working in the area of evidence based policies. His interests lie at the intersection of economics, politics, policy and finance. He can be reached at: abhishekgaurav001@gmail.com

Posted by The Indian Economist | For the Curious Mind