Digital transformation and the paradox of financial inclusion in India

by Suyash Rai.

India has made great strides in digital technology, becoming a leading exporter of digitally delivered services to the global economy. These capabilities with computer technology fuelled hopes that digital transformation could yield gains for the Indian state that are comparable to those seen in the private sector. The `Digital Public Infrastructure (DPI)' approach, with India's Aadhaar digital ID system as a prime example, is presented as a path to higher GDP growth for developing countries. There is an emerging debate on the role of the state in shaping the development and deployment of DPIs.

Two key pillars of the Indian story with DPIs are identity services ("Aadhaar") and their impact on financial inclusion. In a new working paper, Economic development and digital transformation: Learning from the experience of Aadhaar and financial inclusion in India, I critically examine the Indian progress on financial inclusion between 2011 and 2021, revealing a paradox: while account ownership surged, account usage remained low.

The facts

The paper analyses India's performance compared to other lower middle-income and middle-income countries. The evidence shows:

• Impressive account opening: India witnessed remarkable progress in account penetration, surpassing the average improvement in middle-income countries.
• High inactivity: A significant percentage of accounts in India were inactive, far exceeding the average for middle-income countries.
• Low account usage: India lagged behind in account usage for both consumption smoothing (regular deposits and withdrawals) and digital payments, indicating a gap between account ownership and actual financial inclusion.

The role of government mandates and Aadhaar

We argue that the rapid scale of account opening was caused by a series of government and Reserve Bank of India (RBI)mandates, particularly the Pradhan Mantri Jan Dhan Yojana (PMJDY). While Aadhaar played a role, it was primarily used as a physical ID for KYC, rather than as a digital ID through e-KYC. The gains in account opening may have a lot to do with state coercion and less to do with DPI.

The primary objective driving these initiatives was to facilitate direct benefit transfers (DBT) for welfare schemes. The government's focus on DBT aimed to reduce leakages and improve attribution for its welfare programs in the eyes of voters.

Why did this approach yield disappointing results?

The paper explores several reasons for the limited account usage despite the increase in account ownership:

• The lack of a viable business model: No-frills accounts, with zero minimum balance and free transactions, are commercially unattractive for banks.
• Mismatch between the solution and the problem: The focus on account opening for DBT didn't necessarily translate into accounts that address the richness and complexity of finance for the poor, of meeting the diverse needs of users for consumption smoothing and payments.

Lessons

The top-down approach, with a readiness to utilise the coercive power of the state, has limitations. While the government achieved its objective of scaling up DBT, this came at the cost of genuine financial inclusion and limited the potential uses of Aadhaar as a DPI.

We highlight the need for a more balanced approach, considering market forces and user needs, so as to obtain better outcomes with DPIs. We stress the importance of political creativity, institutional reforms, and a broader understanding of public value, beyond narrow fiscal objectives, when designing and implementing DPIs.

We offers insights into the complexities of digital transformation and financial inclusion, challenging the simplistic narrative of Aadhaar's success. These experiences invite us to rethink the role of the state in shaping DPIs and consider alternative approaches that can truly leverage technology for inclusive and sustainable development.

Suyash Rai is a Fellow at Carnegie India and a Visiting Research Fellow at the xKDR Forum

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Announcements

A course: Political Economy of Development

by Abhinav Singh.

Political economy of development is an 8-module course that combines theory with historical evidence to help you understand economic development.

When studying economic development, people often struggle because:

• They can't find a clear learning path
• The concepts can be tricky
• Many discussions jump to solutions without examining why good ideas often fail

This course offers a structured way to work through these challenges.

We explore one central question: why do so few countries achieve rapid economic growth, even though some have shown us how? At independence, India had modern institutions, a diverse industrial structure, and a committed leadership. Yet it grew more slowly than Taiwan and South Korea. We try to understand why.

Course Structure

We start with the basics of economic growth, examine India's development path, and compare it with Taiwan, one of the rare success stories of the 20th century.

The course runs for 2 weeks with:

• 4 live weekend lectures
• 4 self-paced modules on our learning platform

The December 2024 cohort starts December 21. You can learn more at the course webpage.

About polekon

Polekon's mission is to make political economy more accessible for non-experts. We run focused courses on big questions and organize discussion-based seminars for deeper learning. If you'd like updates about future courses and seminars, please sign up for our mailing list.

Judicial overreach: Bypassing expert tribunals in the electricity sector

by Natasha Aggarwal and Bhavin Patel.

A 2023 decision of the Supreme Court (The Southern Power Distribution Company of Telangana State v. Agarwal Foundaries Private Limited and Another, SLP (C) No. 14047-14066/2019) underscored the importance of judicial deference to expert bodies, stating that the High Court should have remanded a technical matter to the Appellate Tribunal for Electricity (APTEL) instead of adjudicating it itself.

The Electricity Act, 2003 establishes a framework under which appeals from orders of the Central Electricity Regulatory Commission and State Electricity Regulatory Commission (SERCs) may be filed before the APTEL. In 2021-22, only 12 appeals from the Telangana State Electricity Regulatory Commission (TSERC) were filed before the Appellate Tribunal for Electricity (APTEL), while 85 appeals were filed before the Telangana High Court (that is, more than seven times the number of appeals before the APTEL). Therefore, a large number of challenges to the TSERC's orders were filed before the High Court, and not the APTEL, a sector-specific expert body. Notably, this problem is not unique to Telangana and exists in other states from time to time. For example, in 2019-20, 21 appeals from the Odisha Electricity Regulatory Commission were filed before the APTEL while 34 writ petitions were filed before the High Court.

The trajectory of the TSERC's orders, from the TSERC to the Telangana High Court, raises questions on the grounds and scope of judicial review of these orders and their adherence to well-established principles of administrative law. These principles caution against judicial overreach in reviewing regulatory decisions. Over time, the Supreme Court of India has established the circumstances in which judicial review is permitted as well as the considerations that may be relevant in deciding to exercise judicial review.

In a recent paper, Bypassing expert tribunals through writs: Judicial overreach in review of the Telangana State Electricity Regulatory Commission's orders, we study 179 writ petitions and 181 writ appeals involving the TSERC before the Telangana High Court between 2014-2022 and examine whether judicial review of the TSERC's orders by the High Court is within the permitted limits in administrative law.

Our study reveals that 52.5% of the writ petitions in our subset and 58% of the writ appeals in our subset fall squarely within the scope of the matters for which the Electricity Act provides an appellate mechanism through the APTEL. Therefore, the largest number of writ petitions and writ appeals relate to 'substantive matters', which we identify as those that the Electricity Act contemplates as falling within the scope of TSERC's quasi-judicial powers and APTEL's appellate jurisdiction.

The existence of an efficacious alternative remedy, such as an appeal before the APTEL is not a complete bar on judicial review. However, well-established principles of administrative law limit the situations in which courts should entertain matters when such an alternative remedy exists, particularly because specialised tribunals and appellate authorities have the technical expertise to examine the facts and merits of a case. Moreover, the rationale for providing such an appellate mechanism is the requirement of technical expertise, and the APTEL has such expertise while the High Courts may not, and therefore the exercise of judicial review in such situations undermines the objectives of the Electricity Act.

The authors are researchers at TrustBridge Rule of Law Foundation.