India?s growth story experienced a huge step-jump in the first decade of the 21st century. India?s annual growth averaged almost 8% in the last decade before the onset of the financial crisis, compared to an annual average growth rate of 3.5% in the first three decades after Independence. The five years before the crisis witnessed growth rates of 9%?unprecedented in India?s economic history. Naturally, all this has begun to have a material impact on the lives of Indians: real per capita income has increased by 70% in the course of just one decade, infant mortality rates are down and life expectancy is up.

We can?t and shouldn?t be satisfied with this. It is critical that India continues on a trajectory of sustained high growth if we are to pull the millions out of poverty. The questions that arise are, therefore, obvious. What are some of the critical preconditions to sustained growth? And, specifically, what role can the financial sector play in helping achieve these outcomes?

A sharp rise in investment rates has been key to growth in the last decade. During 2003-08, investment?s share in GDP rose 13 percentage points to 37% of GDP. If the high growth is to be sustained, it is imperative to maintain and increase private investment rates. However, if we are to do this without relying excessively on foreign capital?given the inherent volatility and risks involved?it is important that domestic savings support investment. Herein lies the paradox. India has one of the highest savings rates in the world; yet more than a third of this is invested into physical assets and gold, and does not make its way into financial assets to support productive investment.

The principal challenge before India?s financial system is clear: to mobilise and channel a significantly larger fraction of household savings into financial assets. Achieving this, however, necessarily entails moving to a more ?financially inclusive? society. The extent of financial exclusion in India is staggering. Sixty per cent of Indians (primarily in rural India) do not have bank accounts. Less than 10% have access to life insurance. Less than 1% have any form of non-life insurance. Net-net, there is a whole parallel society that is excluded from India?s formal financial sector. Therefore, it is crucial that banks find ways to penetrate this segment of the society if a greater fraction of household savings is to be channelised into financial assets to support productive investment. Much has been written about the implications for equity from greater financial inclusion?as India?s poor, rural households will finally get an opportunity to save, build investments and get access to credit. Although this fact is understood by most, what is less appreciated is that mobilising savings from the financially excluded and efficiently allocating these resources towards investment opportunities is a critical prerequisite for India staying on a high-growth path.

Can the Indian financial sector find creative ways to penetrate this market? Can the financial sector do what the telecom sector did? If ever there was a time for India?s financial sector to make this leap, it is now. India is on the verge of becoming a financially inclusive society what with technology in banking, macro-policy initiatives, branchless banking initiatives and confluence of various factors providing the perfect launching pad.

The technological revolution in retail banking has been nothing short of dramatic! The days of yore?of standing in long lines at a specific branch at a specific time to withdraw cash?are long gone. Anytime, anywhere banking as ATMs, net banking, mobile banking and debit cards are the order of the day in urban areas. While these are often discussed in the context of changing the service delivery model for urban customers, people tend to dismiss how they have dramatically reduced transaction costs. An NCAER study estimated that a cash withdrawal at a branch costs a bank Rs 10, an ATM costs Rs 4 and a debit card costs just Rs 1!

Banks can now easily offer more banking services to the financially excluded in rural areas due to the reduction in transactions costs. That day won?t be far when ATMs will spring up in areas where branches are deemed uneconomical. Soon a visit to the ATM will almost completely preclude the need to either set up or visit a branch, given the growing suite of applications available on ATMs.

However, the real potential lies in mobile banking. Approximately 550 million Indians currently have mobile phones, in excess of those that have active bank accounts. Industry experts believe that mobiles have the potential to serve like multi-application smart cards that would allow customers in far-flung rural areas to transact a whole suite of banking applications without ever visiting a branch. The reduction in transactions costs will make this proposition increasingly attractive for banks.

While technology has reduced transaction costs and made the supply of banking services for the financially excluded more feasible, important policy initiatives will make the demand for these services necessarily rise. The much-awaited implementation of the UID system will increase both the ability of India?s rural population to set up no-frills bank accounts (by making it easier to comply with KYC norms) and the desire to do so (since subsidies are likely be made through direct cash transfers into bank accounts).

Corresponding to attempts to take banking services to areas that lack branches, banks have also begun to implement a variety of other ?branchless banking? models. Under this, NGOs, post offices, mom-and-pop shops, school teachers and a variety of agents?who typically have day-to-day relationships with the constituents of a village?are able to provide simple banking transactions to rural Indians on behalf of banks. Besides this, microfinance efforts continue to proliferate and self-help groups are being increasingly brought within the ambit of the formal banking sector.

In conclusion, moving to a financially inclusive society does not look insurmountable any longer. Technology, branchless banking, the UID project and cash subsidies have the unique opportunity to interact to bring millions of Indians into the banking system and thereby make India a more efficient and equitable society.

The author is CEO, JPMorgan, India