The Great India Stack Story

Source: The post is based on the article “The Great India Stack Story” published in The Times of India on 7^th June 2023.

Syllabus: GS 3 – Indian Economy – Inclusive Growth

Relevance: About digital financial inclusion

News: The article explains India’s achievement in digital financial inclusion.

How has financial inclusion evolved?

The term financial inclusion was first introduced by former RBI governor YV Reddy, emphasizing the importance of enhancing access to banking services for marginalized sections of society.

However, the term today has evolved to digital financial inclusion.

What is digital financial inclusion?

Digital financial inclusion includes universal access to and use of formal financial services relating to saving, borrowing, investing, insurance and pension by digital means. Thus, going beyond microfinance and microcredit.

India, in this area, has emerged as a global and undisputed leader during the past nine years.

What is India’s digital financial infrastructure?

India Stack is India’s digital financial infrastructure. It addresses nearly all aspects of financial inclusion using digital technology.

The infrastructure is secure, reliable, and interoperable among different companies. In terms of efficiency, access, cost effectiveness and scale, it has no competitors around the world.

India Stack effectively ‘stacks’ three different layers of digital infrastructure.

What are the three different layers of digital infrastructure in India Stack?

Layer 1: Layer 1 is the Aadhaar identity system, which enables electronic verification of an individual’s identity. Within this layer, electronic authentication of identity (e-KYC) and electronic signing of documents (e-Sign) are facilitated.

Layer 2: Layer 2 of India Stack is the payment layer formed by platform Unified Payments Interface (UPI), which intermediates secure fund transfers between Aadhaar-linked bank accounts in real time and at no or minuscule cost. The system facilitates peer-to-peer (P2P) as well as peer-to-merchant (P2M) transactions.

Layer 3: Layer 3 of India Stack is the data layer. Once fully implemented, financial information providers (FIPs) such as banks, credit rating agencies, insurance providers, etc. would store the transactions data of their customers under their Aadhaar numbers on the platform.

Financial information users (FIUs) such as lenders, wealth managers, brokers and wallet firms will have access to these data but not directly.

However, only the RBI-regulated account aggregator fiduciaries will have direct access to the platform and would, with the consent of the customer, provide their data to the FIUs in return for a fee.

This data sharing will speed up transactions such as loan and insurance sales and facilitate targeted marketing.

What can be the way ahead?

With the help of Layers 1 and 2, digital financial transactions have grown from just 4.4% of GDP in 2015-16 to 76. 1% in 2022-23.

Further, India’s digital platforms are also integrating financial inclusion with economic inclusion. The government now makes cash transfers directly to the bank accounts of farm families.

Even other countries are looking forward to adopting India’s DPI model. These all-show India’s achievements in financial as well as economic inclusion.