Article 5 min

Aadhaargate: Why India Inc. Is Fretting Over Recent Changes to the Country’s National ID System


In 2016, Paul Romer, the former chief economist of the World Bank, called Aadhaar – India’s national identity scheme — the most sophisticated ID program in the word. Romer’s opinion is grounded in hard statistics — covering more than a billion people across one of the most geographically, culturally and ethnically diverse regions in the world, the Aadhaar is the largest biometric data source in the world. Ten years since its launch, close to 89% of India’s 1.4 billion (approx.) population has an Aadhaar card — from port cities straddling the Indian ocean to Himalayan villages perched 4,500 meters above sea level, the Aadhaar has become the most widely used identity document in India.

However, on September 26, 2018, the Supreme Court of India — its apex court — struck down Section 57 of the Aadhaar Act, preventing private companies, such as banks, fintech solutions, telecom companies, among others, from accessing Aadhaar data; the judgement was a blow to these private entities, which need to comply with India’s Know Your Customer (KYC) regulation, because they have been relying on Aadhaar IDs to digitally onboard customers.

Let us try to understand the founding mission of Aadhaar before understanding the ramifications of the Supreme Court’s judgement.

Aadhaar: A totalizing framework for national identity

At its inception, the Aadhaar’s purpose was:

  • Identify beneficiaries of India’s welfare schemes so that benefits are disbursed to those who actually need them. This was one of its primary motivations — with corruption rampant across India’s public services, welfare benefits for the poor were being usurped as a result of bureaucratic malfeasance.
  • Create a universal identity scheme; prior to the introduction of Aadhaar, there was a wide array of government-issued documents that were used to establish one’s identity. Opening a bank account, for instance, required a combination of IDs: Passport, driver’s license, a PAN card (tax card), ration cards etc. Often, banks required customers to produce copies of such documents attested by the appropriate authorities, to fulfill Know Your Customer (KYC) requirements. In this context, Aadhaar was envisioned to streamline the compliance and customer onboarding process.
  • Create a verifiable identity for India’s poor. With India still being primarily an agrarian economy, a large section of its population still resides in remote and rural regions. High levels of illiteracy, combined with poor access to government services, meant that this section of the population did not have an official identity. The Aadhaar was intended to give this large subset of Indians an identity for the very first time, along with creating a mega data source of identity information which could then be used to verify identities.

How the ground realities of Aadhaar triggered judicial action

Aadhaar became a national issue after a series of galvanizing media reports: Multiple cases of bank fraud emerged wherein customers lost their savings after their Aadhaar information was compromised. Notwithstanding the serious security vulnerabilities that Aadhaar presented, privacy activists and pundits made the case that the Aadhaar Act impinged on the Right to Privacy, which was declared a fundamental right by the Supreme Court in 2017.

According to Jean Drèze, one of India’s most noted development economists, there were two crucial privacy concerns around the use of Aadhaar:

  • Private companies, such as banks, telecoms, fintech solutions, required customers to sign up for their services using Aadhaar card. This was not optional — it was a requirement. For private companies, Aadhaar was highly effective in streamlining the boarding process; it allowed them to digitally onboard customers, and it dramatically reduced the operational cost of verifying the identity of customers. According to Drèze, however, there was always the persistent threat of private players monetizing their customers by selling their Aadhaar information for targeted advertising, consumer marketing and, the creation of a credit rating infrastructure.
  • The second objection was based on fears of state surveillance. Drèze argued that the Aadhaar allowed the government to build a 360 degrees profile of an Aadhaar cardholder. According to Drèze, the Indian government could build a comprehensive profile on a citizen by using their Aadhaar details to link their information from disparate databases. The government, Drèze argued, could not only glean information on who a citizen talks to, where she travels, what she buys, but also her browsing history.

eKYC or Manual identity verification? Future of uncertainty looms before India Inc.

By scrapping Section 57 of the Aadhaar Act, the Supreme Court barred private entities from using Aadhaar to fulfill KYC requirements. For private entities, the verdict is problematic to say the least: Aadhaar was the cornerstone of their electronic Know Your Customer (eKYC) process; it allowed private entities to digitally onboard customers at a fraction of the cost — according to estimates, eKYC cost ₹15 per customer, while manual identity verification costs ₹100.

Aadhaar-enabled eKYC allowed private entities, particularly fintech solutions, to acquire customers and grow at a rapid pace; according to industry leaders and technologists, the Supreme Court judgement has created serious obstacles to the growth of private industry.

At present, though, a cloud of uncertainty hangs over private industry; indeed, opinion is divided over the interpretation of the judgement: Does the judgement place a blanket ban on the use of Aadhaar for eKYC? Can private entities still ask for a customer’s Aadhaar number provided he agrees to share his Aadhaar details with them, — effectively reverting customer onboarding costs back to pre-judgement levels?

Only time will tell.