Aadhaar: Can 12 Digits Save The Poor?

13 April, 2012

Over the past couple of years, an initiative by the government of India has been gaining momentum which may have far-reaching implications for its residents. In early 2009, the Unique Identification Authority of India (UIDAI) was set up to issue universal ID’s (UID). The programme is called Aadhaar which means foundation or support.

However, most people still refer to the programme as UID. This is the one rare initiative from the government that excites me because it can help the people who need it the most the poor.

Currently, most government aid programmes are pilfered so heavily that at one point, Rajiv Gandhi had said only 15 per cent of the benefits reached the poor. The public distribution system (PDS) distributes subsidised food and non-food items to India’s poor via ration cards issued by the government. However, these ration cards get duplicated and ‘ghost’ accounts are created. The food is then taken out and sold in the open market. Even before the food reaches the recipients, there is ‘leakage’ all along the supply chain transportation, warehouses and government officials.

The aim of Aadhaar is to create a central database and provide proof of identity when using government services. Aadhaar will be technologically advanced in that it will be a combination of a person’s iris scan, fingerprints and photograph, and will optionally include demographical information such as age, sex, address, parents’ details, etc. With an iris scan, you can be sure that only the bona fide recipient of the food or cash subsidy is receiving the benefit and not a middle man, which is often the case today. Aadhaar has an ambitious goal of issuing 600 million numbers in the next four years. The Aadhaar number will be 12-digit long and oddly enough, there is no card it’s just a piece of paper with a number. The user will authenticate his/her identify via fingerprints and an iris scan; hence, there is no need for a smart ID card.

Aadhaar will be useful in five areas: Food distribution via PDS; National Rural Employment Guarantee Act (NREGA); Healthcare services; Education and Financial services. The last one excites me the most, since it may put an end to the poverty tax that so many citizens of India face on a daily basis.

The poverty tax is everywhere if you are poor in India. If someone wants a loan, they can’t go to their local bank because they don’t have the required documentation, which leaves them to the loan sharks where the interest rates charged would bring tears of joy to any investment banker. When you receive money from someone, you can’t put that into a bank account. So you lose out on the interest that you might have received from a bank. If you receive a pension, you may have to pay a ‘fee’ to the clerk to speed up the transaction. It’s the same with food, subsided kerosene, government jobs, etc. If you want something, you have to pay a fee. That fee hurts more if you earn less and hence, it’s called the poverty tax.

Financial institutions are thrilled at the prospect of Aadhaar because they can start to market their products to potentially 600 million new customers. With the large number of mobile phone users in the country, it also means that banks don’t have to set up branches in every corner. In fact, they can use mobile phones to keep track of balances, instead of the old-school passbooks. Near-field communications (NFC) are probably a couple of years away from being adopted by the mass market, but that is potentially another game changer when it comes to how people transact in India.

Aadhaar will also streamline the plethora of numbers that many middle-class people need to keep track of. If you are a tax-payer and an investor, you may have several authentication numbers such as PAN for taxes, and TAN, TIN, MIN, DIN and folio numbers for investing in mutual funds. The reason for multiple numbers is simple each group has a vested interest in keeping its numbering system because it creates jobs for them and, more importantly, they have access to the money flow. Knowing where the money is coming and going is a source of information that can be used against an individual.

For Aadhaar to work, it needs to be made mandatory. Currently, it’s optional and that may be more of a political move. If Aadhaar happened to be mandatory from Day I, people would jump to the next logical step using Aadhaar for voting. And changing anything that has to do with the election process would absolutely disrupt the status quo and would be shot down by politicians in a heartbeat. However, once end-users start craving for the ‘optional’ Aadhaar, nothing can stop its mass adoption which will make it mandatory in the end. The second thing that needs to happen is that Aadhaar should be an acceptable form of Know Your Customer (KYC). This would help financial institutions, mobile phone providers or almost anyone who needs to authenticate an individual for a company’s product or service. Since the government would have validated someone’s identity, why go through the process again? This would also lower the acquisition costs for companies and allow them to provide no-frills services.

Facebook Connect in the virtual world has turned into the de-facto standard for identify, whereas Aadhaar has the same potential in the real world for India. In fact, Aadhaar can be the catalyst to open up many more markets for companies and can also bring products to a set of customers who have been previously excluded from financial services.


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Aadhaar: Can 12 Digits Save The Poor?

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