How is it KYCd yet also private?

It's the intention and use case. The government want to reduce the fund leakages and reduce corruption, directly transfer the money to citizens, reduce transaction costs. Hence it works.

The government does not track all the transactions. You need a police FIR, to review these transactions.

In short, Indian government does not track or they don't have the scaling to track. But they can do it, if there is any criminal complaint.