Despite India's success in pushing the DPI agenda during its Presidency of the G20 there have been some criticisms about the actual impact of its financial inclusion efforts. While there is no doubt that we are prone to embellishment, India's achievements in the area are substantial. Criticisms about coercion are also unfounded given some level of market orchestration is necessary — especially in low and middle-income countries that are looking for accelerated development.
This is a link-enhanced version of an article that first appeared in The Mint. You can read the original here.
Among the more significant contributions to India’s G20 success was the Finance Track consensus reached under the Global Partnership for Financial Inclusion Working Group around the use of digital public infrastructure (DPI) for financial inclusion. This agreement, arrived at after considerable negotiation, was captured in a World Bank report that had the most comprehensive listing I have seen to date of DPI systems deployed around the world, and articulated a set of policy recommendations for other countries seeking to use DPI to advance financial inclusion.
Asking Questions
Even with the widespread acclaim for all India has managed to achieve at the G20, some questions are beginning to be raised. For example, a recent article on the subject wondered whether India’s achievements in financial inclusion may have been overstated. It pointed to our widely celebrated success at growing the number of adults with bank accounts from 35% in 2011 to 81% in 2017, arguing that this is not the singular achievement it has been made out to be. According to the World Bank’s Global Findex Database (GFD)—from which these figures were extracted—at least 48 other countries have achieved similar success. If so, what, the article argues, is so exceptional about India’s growth?
While this might be true, it fails to mention the scale of India’s achievement. According to the very same GFD Report, of the 500-plus million new bank accounts opened globally between 2014 and 2017, over half were in India. This increase in the absolute numbers was achieved while India was simultaneously closing the gender gap—from 17% in 2011 to 6% in 2017. These are significant achievements, no matter which way you slice them.
The article goes on to argue that it is not the absolute number of bank accounts in the country that we should be looking at, but how many are active. By that measure, India does worse than all other middle-income countries in the database—with as many as 35% of Indian bank accounts classified as inactive. While this might have been true at the time of the 2017 GFD Report, there is evidence that since then activity in these accounts has steadily increased. Today, just 8% of Jan Dhan accounts have zero balances, with the average balance in each Jan Dhan account standing above ₹2,400.
While all the arguments so far suggest that India massaged the truth to its benefit, the main thrust of the piece is that the India achieved its success through “gratuitous acts of coercion." This, the article suggests, ought not to have been the case—that we should have, instead, allowed the free play of market forces. It is this top-down approach—this “unnecessary paternalism"—that it comes down hardest on.
Innovation and Coercion
It makes a number of arguments in support of this position. In the context of UPI, it points to two mandatory stipulations—the fact that no fees can be charged for UPI transactions and that businesses with more than ₹500 million in annual sales are obliged to accept UPI payments at all their establishments—as evidence of things that ought to be have been done differently. It argues that thanks to these measures, innovation in the payments space has been stifled—particularly when compared to other countries whose payment systems (Brazil’s Pix in particular) have been free to operate without similar coercive constraints.
In the first place, there is no evidence that these “paternalistic" stipulations have slowed down innovation. New features are constantly being added to the digital payments ecosystem—just last month, 4 new UPI features were launched (including Hello UPI, the voice-payment feature that will significantly extend the reach of the digital payments ecosystem). This does not look like an ecosystem that has stopped innovating.
Secondly, while Pix is without doubt an excellent fast payment system, it is hardly an exemplar of one that has grown without coercion. According to the Bank for International Settlements, it was precisely because the Brazilian Central Bank required all banks and payment institutions with more than 500,000 transaction accounts to participate in Pix that this payment system was able to establish the user base necessary to kick-start the network effects needed for the open-loop payment platform to gain traction.
The fact is that when it comes to DPI, market orchestration is sometimes necessary. Low and middle income countries looking to leapfrog traditional cycles of development often cannot afford to wait for market forces to do their thing. They need to be able to intentionally effect change—by catalysing market forces to achieve societal outcomes. In some instances, this could even mean insisting that market participants adopt new technologies sooner than they otherwise would have if left to do it themselves.
False Modesty
To be clear, I do not disagree with the fundamental premise of the article. It is a fact that we often do go overboard when we speak of our achievements—embellishing the truth and leaving out details that ought to have been included. If we want the world to respect us for our achievements, then we cannot afford to be parsimonious with the truth.
Yet, today the world is celebrating India’s achievements and looking towards us to set an example for others to follow. Now is not the time for false modesty.
