Editorial: Digital rupee and the cashless dream

At the Union Budget, Finance Minister Nirmala Sitharaman announced that the government was considering introducing its very own Central Bank Digital Currency (CBDC), or in the case of India, a digital rupee, by the year 2023. For most observers, the announcement seemed to be a bouncer of sorts. After all, what would be the use case for a CBDC in India at this point in time, when basic financial inclusion itself, let alone digital banking, has not hit the sweet spot as far as the masses are concerned.

As per a BIS survey of central banks conducted in 2021, 86% of the institutions were actively researching the potential for CBDCs, while 60% were experimenting with the technology and 14% were deploying pilot projects. It may be recalled that barring China, no other major economy has conducted extensive trials on the implementation of CBDCs. Singapore, which was following closely on the heels of China, seems to have put on hold its plans of issuing a CBDC. Interestingly, Sweden was said to be giving a deep consideration to the issuance of its own CBDC, an e-krona. For many central banks that were faced with the diminishing use of paper currency, a CBDC offered the perfect excuse for switching to a more acceptable form of electronic currency. If one had to compare the scenarios in India and Sweden, bank notes still account for 15% of the money supply in India, whereas it’s a minuscule 1.5% in Sweden. However, despite having tossed the idea around for over five years, the Scandinavian nation’s Riksbank is not rushing things on this front.

So why does India seem to be in such a hurry to bring about its own digital rupee? For starters, as compared to the anonymity of cash, CBDCs will be designed in a way so as to be tracked by the central banks. What could also be on the radar of the government is the elimination of a highly expensive network of intermediaries or correspondent banks that facilitate cross-border payments. What this means for Indian citizens working abroad is that sending remittances home could turn out to be more cost-effective as well as simpler. Apart from this, overseas business/e-commerce could also be simplified in terms of conversion of rupees into dollars and vice-versa.

Of course, the counter argument is that India, which is known as the world’s top recipient of remittances, could benefit from substantial savings even if it routes its transaction without a digital rupee, and instead opts for the Nexus project, which is a global network proposed by the Bank for International Settlements. Crypto experts believe that India’s proposed roll-out of its own CBDC is in response to the massive uptake of private cryptocurrencies by millions of users within India. But it remains to be seen how the government can possibly prompt private crypto users into adopting the CBDC issued by the RBI.

According to a research note released by the SBI following the budget announcements, the digital rupee could have several use cases, including programmable payments for subsidies and use by financial institutions for faster lending and payments. There is also an argument to be made in favour of CBDCs that it could possibly further financial inclusion among those who still have not had access to the banking framework, but are nevertheless clued in, thanks to smartphones. For all practical purposes, the introduction of the CBDC could signal a pragmatic shift to a cashless economy, something that was set into motion post demonetisation.

Stakeholders still believe the government should pace itself, vis-a-vis the rollout of the digital rupee. Ideally, India must take a cue from advanced economies, which have adopted a multi-year strategy for the introduction of digital currencies keeping in mind all the risk factors, including the governance of payment systems, and policing what’s legal and what’s not.