On Friday, Columbia Professor Arvind Panagariya visited the College to deliver the keynote address for this year’s Center for Development Economics (CDE) conference. Panagariya is the former vice-chair of the National Institution for Transforming India, where he worked to improve India’s economy and bring the country into the technological, modern world. His speech on Friday, titled “Financial Technology, Inclusion and Development: The Case of India,” focused on examining the recent improvements and developments in the Indian economy through the lens of financial technology (FinTech).
Panagariya began his talk by marveling at the speed of India’s economic improvements. “As late as the 1980s, I didn’t believe that we would be where we are today,” he said. He described India’s old economy as “clunky” and inefficient, filled with arcane regulations and bureaucracy. Though he acknowledged that this problem persists somewhat, the recent systemic change was remarkable to him. “If that can change, anything is possible,” he said.
Panagariya then transitioned into the specifics of India’s development through FinTech. FinTech encompasses all technology that allows for financial transactions, including payments and transfers via mobile apps, loan and insurance websites, crowdsourcing sites and robo-advice in stocks and assets. Although India’s FinTech services lag behind those of many developed countries, Panagariya contended that their spread was notable for a nation in the developing world. “For a country with a per capita income of less than $2000 per year, India is spreading its financial technology remarkably quickly,” he said.
Many barriers exist for the spread of digital transactions in a developing country like India. “The infrastructure in India is being built up to bring households into [FinTech],” Panagariya said. “This requires building extensive platforms through which these transactions can be engaged.” For many non-cash transactions, a proof of identity is needed. In India, ID cards have not always been easy to come by. “Even in the past decade, there was no system to give every person a proof of identity,” Panagariya said. Most people in India simply had no way to verify who they were, making non-cash transactions exponentially more difficult. This changed in 2010, when the first Aadhaar Card was issued as a government-based ID card available to all Indians. The Aadhaar Card incorporates 10 fingerprints and an iris scan, and it has reached nearly full saturation in the past eight years. “To open a bank account, you need a proof of identity. These cards provide it,” Panagariya said.
Of course, a bank account is also necessary to engage in these transactions. In this, too, the Indian economy has made significant progress. Five years ago, Panagariya explained, only 47 percent of Indians had bank accounts. However, when the government began the Pradhan Mantri Jan-Dhan Yojana program, which focused on increasing the accessibility of bank accounts, 18 million new accounts were created in a single day. Nevertheless, problems remain for those living in rural areas. “Most rural people are still 10 or five miles away from a bank,” Panagariya said. “The government wants to make sure that these accounts are being used. But they can’t be used if they aren’t accessible.”
Strides have also been made in connecting accounts to one another through FinTech. One of the main drivers of this increased connection has been the spread of cellphones. “As late as 1999, the total number of telephones in India was 40 million,” Panagariya said. However, there are now 1.2 billion phones in India, half of which are in rural areas. Because of the Aadhaar Cards, however, phones are no longer entirely necessary to complete these transactions. “Because you have government identities, you don’t need a phone,” Panagariya said. “If you’ve got a bank account, and if you’ve got a thumb [for fingerprints], you can do these transactions.” He believes that this technology could radically restructure the foundations of the Indian economy. “In a few years, many believe that credit cards will become history in India,” Panagariya said.
Panagariya also discussed a variety of other developments in FinTech, like the Government e-Marketplace. “It’s basically like Amazon, but by the Indian government,” he said. In addition, he discussed WhatsApp pay, a new feature of the communication application WhatsApp that he described as “the big disruptor that’s about to happen.” He also mentioned the Indian government’s debate over the spread of Bitcoin, which it has thus far tolerated. “The government is a bit ambivalent about Bitcoin,” he said. “[I took part in] some of those discussions, and many people wanted to shut the whole thing down.”
Panagariya concluded by giving a few parting lessons from his work in the National Institution for Transforming India. He shared his philosophy that no technology can substitute for growth and that incentives matter when determining policy. “Giving people the means to transact digitally will not cause them to do it,” he said. “You need to have the right policy.” Additionally, he vouched for removal when a policy is not working. “Sometimes, you don’t need effective implementation of poor policies – you need them removed,” he explained.
At one point in the talk, Panagariya offered a more philosophical note. “As academics, it is very difficult for us to gauge what influence we are having… You cannot truly know whether you’re having any influence or not,” he said. To him, a strong conviction is more important than clear evidence of change. “Having the belief that ‘yes, this is good’ is crucial when you want to effect change,” he said. This conviction is Panagariya’s guiding philosophy throughout his work on economic reform.