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The Reserve Bank of India has selected four public sector banks – State Bank of India, Punjab National Bank, Union Bank of India and Bank of Baroda – to run a pilot Central Bank Digital Currency (CBDC) project ahead of a possible rollout this financial year.
The digital rupee is expected to have various implications for the economy and monetary policy, Reserve Bank deputy governor T Rabi Sankar had said earlier this year. He further emphasised that RBI was looking at CBDC as just the digital form of paper currency at the moment.
However, the benefits are aplenty, especially for India’s financial system as well as the economy.
( Source: European Central Bank report)
Growing digital economy needs a digital currency
While presenting the Budget 2022, Finance Minister Nirmala Sitharaman had said that the introduction of CBDC will give the digital economy a major boost. India’s digital economy is expected to grow exponentially in the coming years, reaching USD800 billion by 2030 on the back of rising internet penetration and increasing income.
With the Narendra Modi-led government pushing for digitalisation with initiatives such as ‘Digital India’, it makes sense for India to have its own digital currency – the digital rupee.
A distributed ledger technology-driven digital rupee can help the government better deliver government-to-citizen payments, such as social welfare disbursements (Pradhan Mantri Vaya Vandana Yojana, for example), or provide loans and subsidies to farmers. Due to the involvement of various intermediaries, oftentimes, the benefits fail to reach the beneficiary.
It will also facilitate instant MSME lendings. The government could run all credit schemes for MSMEs through the digital rupee. All stimulus packages for MSMEs can be disbursed from the central bank directly to the beneficiaries.
Moreover, CBDC has the potential to completely replace notes and coins, according to Deloitte. “The introduction of CBDCs could serve as an impetus to improve the monetary policies for Central Banks. Its architecture and structure could allow for the seamless and transparent distribution of government benefits to individuals, improving control over transactions.”
A wider use of CBDC ensures that all transactions are documented and could help the government fight corruption. Bank of America’s managing director David Hauner opined that CBDCs could raise tax revenue, and reduce corruption and other illicit activities that depend on cash use.
Improved payment system
CBDC will also improve the digital payments landscape. Almost 40 per cent of all transactions in India are done digitally. According to a report, digital payments in the country will constitute nearly 65 per cent of all payments reaching USD$10 trillion by 2026.
The growth is driven by the increasing internet penetration in India and by technologies such as Unified Payment Interface (UPI) which facilitates payment almost in real-time. The introduction of CBDC will not only help India improve its domestic payment landscape, but also potentially enable more real-time and cost-effective globalisation of payment systems.
Digital currencies also eliminate the need to have a bank account. Let’s take China for example, which has a highly digitised domestic payment landscape, and is also working on digital renminbi with the hope of further improving its payment landscape.
Cross-border payments
Despite having a fast and cheap domestic payment system, the cost of India’s cross-border payment system is high as a lot of intermediaries are involved in the process. A standard forex transaction could take two to three days to be settled. The digital rupee could potentially reduce the time and cost of cross-border transactions, according to T Rabi Sankar.
Let’s take the example of India and the US. If the CBDC system of both nations can directly engage with each other, there won’t be a need to wait for settlements. CBDCs take out the settlement risk from cross-border transactions, which significantly reduces cost as well as time, he said. We will see the significance in terms of remittances. Last year, India was a top recipient with remittances of around USD87 billion, according to a report by the World Health Organisation.
“Such infrastructure must ensure interoperability of CBDCs across jurisdictions and quick transfer of CBDC for success. In such an environment, CBDC remittances could happen in real-time, rapidly reducing the time required for the payment to be received by the intended recipient,” read a PwC report.
Financial inclusion
According to a World Bank report, nearly 130 million people in India still do not have access to financial services such as bank accounts, credit cards or insurance. The figure is significantly high despite the Pradhan Mantri Jan-Dhan Yojana, which was launched in 2014 with the aim to expand affordable access to financial services.
The CBDCs could help increase financial inclusion by lowering financial access barriers such as the lack of financial education, regulatory barriers, lack of identity credentials as well as geographical barriers. CBDC could help break these barriers and offer the unbanked population an alternative to participating in the digital economy.
Cheaper currency management system
The digital rupee will lead to a more efficient and cheaper currency management system, Sitharaman said. A huge amount of time, money and effort goes into printing, transporting, storing and distributing currency across the country.
RBI spends nearly INR20,000 crore every year on currency management operations. Digital rupee could potentially minimise the use of cash and, at the same time, make currency management much cheaper. It will not only reduce costs but also eliminate the dangers associated with holding cash and increasing the speed of access.
During fiscal 2020-21, the ratio of currency in circulation as a proportion of GDP reached 14.5 per cent. India’s high currency to GDP ratio holds out another benefit of CBDCs.
