Economic Development and Digital Transformation: Learning from the experience of Aadhaar and Financial Inclusion in India

The digital public infrastructure (DPI) approach has gained prominence in digital transformation, with India's Aadhaar often cited as a success story for accelerating financial inclusion. This paper critically evaluates India's progress on financial inclusion from 2011 to 2021, revealing a paradox: while account ownership surged, account usage remained low. The paper highlights that government and Reserve Bank of India (RBI) mandates drove rapid account opening, with Aadhaar enabling account opening mainly as a physical ID and an authentication tool for transactions. The financial inclusion efforts focused on expanding account ownership for direct benefit transfers, often at the expense of service quality. Banks, pressured to meet political targets, faced weak commercial incentives due to restrictive pricing regulations and mismatched service delivery models. These constraints hampered sustainable account usage. The paper explores whether alternative policy designs could have balanced electoral and economic goals more effectively. Demand-side constraints, shaped by socioeconomic conditions, and supply-side path dependencies influenced government choices. However, the analysis suggests room for greater political creativity in defining the policy objectives, liberalizing regulations liberalization to enhance financial inclusion, and leveraging the public sector banks. Finally, the paper discusses implications of this analysis for institutional reforms, including redesigning welfare schemes, revisiting public sector bank ownership, and rethinking top-down financial mandates. It also situates India's experience within the broader debate on the state's role in DPIs, challenging the notion that state-led DPI initiatives inherently maximize public value.