Why Digital Rupee is a distraction and India ought to go slow on it

A digital currency is more of a fashionable trend and trends are for social media influencers, not governments

Fashionable trends are for social media influencers to follow, not governments. The hype around Central Bank Digital Currencies (CBDCs) or a Digital Rupee in the Indian context, seems to be nothing more than a fashionable idea with no practical use.

As a recent NCAER Working Paper has succinctly put it, “India should take a cautious and gradual approach toward launching a CBDC.”

The simple fact is that most of the advantages a CBDC could provide are already in place in India, thanks in no small part to the government’s own efforts.

The NCAER paper, authored by Barry Eichengreen, Poonam Gupta and Tim Marple, points out that the first and most obvious benefit from a CBDC would be to facilitate payments across the country, unlike cash can.

However, the authors themselves go on to point out that this is already possible and increasingly in use thanks to the Unified Payments Interface (UPI).

Indeed, UPI has been a remarkable success in facilitating digital payments. Ever since demonetisation gave it a boost in November 2016, the UPI platform has been growing rapidly. More than Rs 9.83 trillion worth of transactions took place on the UPI platform in April 2022 itself, compared with just Rs 700 crore in December 2016.

Further, the National Payments Corporation of India is testing out various options for offline UPI payments that can be made on basic feature phones, which means that the platform will soon be available to even those without a smartphone or internet.

In other words, India is already enthusiastically adopting a digital rupee. It does not need another one. 

The second possible advantage of a CBDC could be in financial inclusion, the paper says. But it also points out that the Government has made excellent progress in this regard as well.

Steps such as the setting up of Basic Savings Bank Deposit Accounts (BSBDAs), the profusion of ATMs, the relative ubiquity of phone banking services, and the direct push given to the Pradhan Mantri Jan Dhan Yojana have meant that existing strategies are working. The benefit brought in by a CBDC in this regard would be zero to negligible.

In fact, it is difficult to understand how, in a country as financially illiterate as India is, something as new and untested as a CBDC would catch on among the hitherto unbanked. Calling it a long shot would be an understatement.

Yet another supposed advantage of a CBDC is the easing of cross-border transactions. However, as the authors point out, “cross-border transfers of digital rupees will be subject to all the same capital account restrictions as existing rupee-denominated transfers, the only difference being that the RBI will be directly responsible for monitoring and enforcing compliance in the case of a retail CBDC (commercial banks and other authorized intermediaries remaining responsible in the case of a wholesale CBDC).”

In other words, there won’t be enough of a benefit from the adoption of an Indian CBDC to justify its existence.

There is also another issue with CBDCs that nobody—neither governments nor economists—are really talking about: its value in monetary terms. Will the value of an Indian CBDC be pegged to the rupee?

If so, why would people invest in it and not the rupee itself? If the value of the CBDC will be set independently, then will the RBI be issuing two fiat currencies? That will come with its own complexities.

India has been relatively quick to adopt new technology and techniques. It has been quite vocal about the benefits of blockchain technology and several PSUs have already adopted it.

However, it might be prudent to go slow on CBDCs because they seem to be, on the whole, nothing but a distraction.