Know Who’s Who: Aadhaar’s Role in Individual Identification, the Mitigation of Fraud, and Economic Development in India

Abstract

This paper will present India’s problem of proof of identification and the fraud it led to and will introduce Aadhaar, a digital identification system for residents of India, as a solution to this issue. This paper will explore the positive outcomes of Aadhaar and the discourse surrounding the privacy of Aadhaar data. It will end by providing an overview of the research and recommending additional topics for research. This paper will argue that by serving as an accessible digital identification system, Aadhaar is an overall effective policy in India for promoting economic development and mitigating fraud and related issues caused by a lack of identification.

The Problem

In 2009, India had no nationally recognized form of identification. Indian residents had separate ID cards for various government functions such as taxes or subsidized food. Still, none served as an all-purpose identification form throughout the country (Organization for Economic Co-operation and Development [OECD], 2018, p. 28). Therefore, India established Aadhaar, a digital identification system to enhance and mitigate fraud in customer service, rationing, banking, public services, and more. Around 1.3 billion people benefit from it today, making it the world’s most extensive biometric identification system.

Before the introduction of Aadhaar, India had significant problems with identifying who would benefit from which social programs. Many Indians lacked formal identity credentials and several of those with credentials possessed ones only recognized locally. A UCLA Anderson Review article writes that before 2010, “More than a third of the population lacked a birth certificate, and 60% didn’t have bank accounts. Only about half of the poor had ration cards, and it’s estimated that half of the cards circulating were fake” (Totty, 2022). Inadequate proof of identity and verification systems meant that social welfare benefits or certain public goods were frequently provided to the same people multiple times or to people who did not qualify. Eligible residents were sometimes denied resources for which they qualified because they could not easily prove their identity. Furthermore, the lack of nationally recognized identification hindered expanding economic participation. The country’s sizeable population worsened these issues, especially in rural areas where many residents did not have formal identification. Shyam Sunder, Yale University Professor of Accounting, Economics, and Finance, agreed that the lack of an effective identification system hindered everyday processes, explaining how “it could be a days—or months—long affair for a person to establish their identity: whether they are x or not; whether they were born in this place or not; whether their father’s name is that or not” (O’Callahan, 2020).

Discussion

The Unique Identification Authority of India (UIDAI), a statutory authority under the Government of India under the Ministry of Electronics & Information Technology, established the Aadhaar system to solve the issues arising from the lack of a national identification system on January 28, 2009 (UIDIAI, 2023). Aadhaar comprises a twelve-digit identification number linked to primary demographic data such as name, date of birth, address, and sex, along with biometric data such as iris scans and fingerprint records. Aadhaar users are also given a physical card for tangibility. The data is collected and stored by the UIDAI. Although not the first national identification system India has attempted to implement, Aadhaar is the most effective. When the UIDAI was established, there was another competing program called the National Population Register (NPR), housed in the Ministry of Home Affairs (World Bank Group, 2016, p. 6). The NPR had started to collect biometric details as part of a plan to establish a citizenship registration system and to ensure national security. Unlike Aadhaar, which requires only name, sex, date of birth, and address, the NPR recorded education and family history of migration, and included physical verification by an official. In 2011, following a debate between the Ministry of Home Affairs and the UIDAI, it was decided that both departments would collect biometric data separately in different states. However, following the 2014 general elections, the UIDAI was allotted to all states for enrollment, while the NPR process would continue alongside without collecting biometrics but instead linking individuals’ identification data to the aforementioned twelve-digit identification number. Essentially, the difference between Aadhaar and the NPR is that the NPR is a multipurpose national identity system acting as a citizenship ID system. In contrast, Aadhaar is a unique identification system consisting of a different identification card aimed to facilitate the distribution of government services and welfare programs. Unlike the NPR, which is an extensive database of nationwide demographics with a broader range of personal information, Aadhar is not an official citizenship ID system linked to a comprehensive identity database.

Here, it is necessary to introduce the e-KYC (electronic Know Your Customer) service, which provides a mechanism to instantly verify the identity of an individual by electronically verifying their Aadhaar number, which significantly lowers the cost of paper-based verification (UIDAI, 2023). The CEO of a provider called Invest India Micro Pensions Limited expressed that using e-KYC reduced the time taken to process the documents and the costs by 50 percent (World Bank Group, 2016, p. 7). Currently, 34 banks (all the public and private banks in the Indian banking sector) are using Aadhaar to open accounts with e-KYC. Another example of the effectiveness of Aadhaar is that using Aadhaar numbers as authentication to check government employee absenteeism has resulted in employees spending on average 20 minutes more daily at their work desks (World Bank Group, 2016, p. 6). Moreover, having a reliable and official identification method improved living conditions and the use of private and public goods. Without identification, one could not rent a house or even get a bank account, but Aadhaar provides a way out (O’Callahan, 2020).

The Public Distribution System (PDS) is a governmental food security system aiming to distribute food and non-food items to India’s poor at subsidized rates. In addition to social services such as PDS, Aadhaar also encompasses over 3,500 government and nongovernment services such as making digital payments, enrolling in school, activating a mobile phone, receiving pension payments, filing taxes, voting, and making e-signatures (OECD, 2018, p. 29). The benefits of integrating Aadhaar within various schemes include reducing leakages in payments for teacher salaries, books, and uniforms; transferring fertilizer and liquefied petroleum gas subsidies directly to farmers; and providing scholarships directly to students, payments to health workers, and maternity benefit payments (World Bank Group, 2016, p. 11). These benefits illustrate the successful effects of identification to reduce fraud and, therefore, contribute to national economic development. Moreover, the effectiveness of the policy is clearly illustrated by the fact that the initiative has saved the Indian government an estimated US $10 billion over the last 2.5 years by mitigating fraud and abuse (OECD, 2018, p. 32).

In addition to the primary outcome of Aadhaar, which was reducing fraud in the PDS and other services, Aadhaar has also had beneficial side effects, which contribute to economic growth, just as alleviating fraud does. For example, Aadhaar has played a significant role in improving women’s financial lives. Before the introduction of Aadhaar, only 44% of women had bank accounts, whereas this proportion had grown to 90%, as of 2018. Another example is that Aadhaar’s streamlined and automated system makes shopping easier, contributing to the economy of numerous businesses across India, especially small businesses (OECD, 2018, p. 28). Rather than having to physically check the shop repeatedly, Aadhaar users can receive SMS messages to notify them of the existence of new supplies. They can view a map of all stores and their current inventory level via a mobile app connected to their Aadhaar, authenticate their identity instantly to collect their benefits (which reduces in-store wait times from half a day to a matter of minutes), and choose the shop where they prefer to receive their benefits. A central database manages the benefits and permits user authentication at any location, which promotes choice and mobility.

Additionally, to move towards a paperless, faster, more efficient society, Aadhaar has paved the way for the digitization of many other services. For example, on July 1, 2015, the Indian government also launched DigiLocker, a platform for issuing, sharing, and verifying documents and certificates (OECD, 2018, p. 29).

Government officials believe that the full potential of Aadhaar is not yet apparent and that it will likely bring a new wave of digitization to the private sector, with businesses using Aadhaar as a platform (OECD, 2018, p. 29). Considering the open nature of Aadhaar’s interface, the creator believes people will use Aadhaar in more creative ways in the future. The Aadhaar system includes an open application programming interface (API), which allows the program to serve as a platform for private sector companies to build services using Aadhaar identity management as a foundation. This API has the potential to enable countless new apps for various services. For example, a Google app called Tez allows people to send instant digital payments to friends, relatives, and businesses. Within its first five weeks, Tez gained 7.5 million users, drastically increasing the number of Aadhaar transactions. With the facility and accessibility to services provided by Aadhaar, economic growth and development can be expected for India as more and more companies, sectors, and services invest in Aadhaar.

Regarding the sustainability of the Aadhaar program, its funding is worth discussing. The Indian government currently funds Aadhaar as part of the UIDAI, and the UIDAI’s annual budget is approximately Rs 2,000 crores (US $319 million) (World Bank Group, 2016, p. 11). There are two ways for UIDAI to recover its costs: either through the tax system or by charging the user directly. The National Institute for Public Finance and Policy (NIPFP) provided the UIDAI with recommendations for cost recovery, arguing that directly charging the user was a more efficient way of recovering costs. This debate is ongoing, however, since several stakeholders argue that pricing UIDAI services would mean that it would become a private good. Such privatization would be contradictory to the project’s original mission, which was to provide a form of accessible formal identification to as many people as possible. Therefore, funding Aadhaar by directly charging the user is likely not foreseeable in the near future. Despite the NIPFP’s proposal to establish a more privatized Aadhaar, an NIPFP cost-benefit analysis projects that—even at the current state of the program—given the benefits of Aadhaar’s application, the Indian government can receive a return of 52.85 percent over ten years (World Bank Group, 2016, p. 11). The analysis considers the costs of developing and maintaining the Aadhaar authentication infrastructure, the annual budget of the UIDAI, the cost of integrating schemes, the costs of training for staff and registrars, and the incentivization of the banking channel. Overall, Aadhaar is currently a sustainable and effective policy.

However, some concerns and complaints about Aadhaar have arisen in recent years. Although the program was technically supposed to be voluntary, Aadhaar became a necessity after its implementation (Totty, 2022). Some Indian states require an Aadhaar number to receive subsidized rice and school lunches and to buy property. Citizens are asked for their Aadhaar number when sending mail, tracking Amazon packages, or using certain websites. While the widespread adoption of this effective system seems like a positive outcome, it has led to privacy concerns among Indian residents, especially since Aadhaar uses biometric data, which cannot be changed if hackers obtain it. Aadhaar is used for banking transactions, shopping, obtaining cellphone plans, insurance plans, health records, retirement pensions, and more. These broad uses mean that Aadhaar information is accessible to both government agencies and private institutions, and all transactions completed with the help of Aadhaar data can be used to create detailed files about individuals based on their personal data and the individuals’ habits. Consequently, a 2019 survey found that although nearly three-quarters of Indian residents appreciated the convenience of using Aadhaar as an identification system, nearly half of them were concerned about linking the information to too many services (Totty, 2022). Furthermore, critics of Aadhaar say they have been harassed and surveilled by the police and scrutinized by UIDAI members (Bhatia, 2018).

To combat this issue, in August 2017, a series of petitions by privacy advocates challenging the constitutionality of Aadhaar prompted an Indian Supreme Court case. The Supreme Court unanimously issued a landmark ruling that the constitution of India provides that all Indians have a fundamental right to privacy, overruling two previous rulings (OECD, 2018, p. 31). However, no formal ruling was made on whether Aadhaar violates privacy. Aadhaar continues to receive criticism about privacy and security issues.

Conclusive Summary and Further Research

Despite the recent criticisms Aadhaar has received about its handling of data and individuals’ privacy, Aadhaar is an effective policy for promoting economic growth and the solution of India’s proof of identification problem and for the mitigation of the fraud, abuse, and exclusivity of goods and services that follow. The paper has argued that this is because of Aadhaar’s ability to include and reach such a vast majority of the Indian population and based on the substantiality of its positive outcomes since its implementation. This government program established by the UIDAI mitigated India’s problem of proof of identification for its citizens by providing Indian residents with a twelve-digit identification number digitally linked to demographic and biometric data. I have argued that Aadhaar enforces and supports the provision of social welfare benefits and many public goods, which was previously impaired by fraud caused by inadequate proof of identity and verification systems. Although Aadhaar was not the first national identification system India attempted to implement, it proved the most effective. I have discussed how Aadhaar facilitated programs such as e-KYC and the PDS. I have illustrated how Aadhaar has positively impacted various aspects of Indians’ lives, including food distribution, pension payments, government services, private businesses, banking, voting, school enrollment, women’s financial life, employee absenteeism rates, and the efficient digitization of services. I have reviewed sustainability and funding and examined current discourse on security and privacy concerns due to the collection of biometric data and linking of transactions with individuals’ habits, and the Indian Supreme Court’s ruling on the matter.

Topics to consider for further research relating to the issue I have discussed in this paper are as follows:

• • How Aadhaar has affected education in India, and especially girls’ education, considering that providing women rather than men with the financial resources to support their daughters’ education is proven to be an effective strategy in increasing education levels among girls
  • The specific types of concerns prevalent among Indian residents regarding Aadhaar and what Indian residents think should be improved for Aadhaar
  • Whether Aadhaar can actually be considered a public good, considering groups who do not have access to Aadhaar registry or people who cannot provide relevant biometric data (e.g., those who have problems with their eyes and therefore cannot get their irises scanned) may be excluded from this service
  • The processes for the handling of Aadhaar data and whether demographic or biometric data provided to Aadhaar is ever lost; questions related to privacy in the Aadhaar context (e.g., Are violations or concerns of privacy underreported? Are specific groups’ data targeted or tracked? Who has access to the identification data bank?)
  • The public’s opinion on Aadhaar and the public’s trust for the UIDAI
  • What is keeping the minority who are not Aadhaar users from participating in the program, and what steps can be taken to include them

Thus far, Aadhaar has been an effective policy solution to mitigating fraud and identity theft. Answering the aforementioned research questions would provide a more extensive view of the implications of Aadhaar and would improve the security issues associated with it. Answering these questions would generate public discourse around the importance and improvement of policies like Aadhaar. It would recuperate the public’s trust in Aadhaar and possibly inspire the implementation of further innovation.