The Economic Survey, tabled by Finance Minister Nirmala Sitharaman in Parliament ahead of presentation of the Union Budget 2023-24 said the issuance of Central Bank Digital Currency (CBDC) in India offers several benefits, which include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience. It opined that the CBDC has the potential to lay the framework for another generation of financial innovations.
The country witnessed a robust growth in the use of digital payments thanks to the lockdown during the pandemic. The contactless payment option gave rise to adoption of the digital payments method by a considerable segment of the population. The growth of Unified Payment Interface (UPI) in the country paved way for the introduction of CBDC on a pilot basis and the future seems rosy for the digital payments. The UPI accounted for 52 per cent of the total Rs 8,840-crore digital transactions in 2022. As per the latest Economic Survey Report, more than 23 crore UPI QRs have been deployed in the market for accepting merchant payments in just five years from only 25 lakh devices that were accepting merchant payments earlier.
The proposal for using CBDC is not a new concept. As of July 2022, there are 105 countries in the world exploring CBDC, a number that covers 95% of the global GDP. Many countries have already launched the CBDC while others are in the pilot stage.
The Central Bank rolled out a pilot project for introduction of the digital rupee for the wholesale and retail segments in December 2022 in four cities of Mumbai, Delhi, Bangalore and Bhubaneswar with involvement of four banks, State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank. The scope of the pilot project will be expanded to other locations and more banks in due course of time after the response received for the pilot project.
In a latest push to the Reserve Bank of India’s (RBI) ambitious Central Bank Digital Currency (CBDC) project, the Reliance Retail has begun accepting the digital currency for payments at its stores. The company made arrangement with ICICI Bank, Kotak Mahindra Bank and Fintech Startup Innoviti Technologies to deploy the necessary infrastructure for accepting eRupee in its stores. The customers will now be able to check out with CBDC-enabled QR codes at Reliance Retail stores. Digital payments solutions startup Infibeam Avenues said it has processed the first batch of CBDC transactions for online retail users. Similarly, voice-focused payments solution startup ToneTag also said it has partnered with IDFC First Bank to enable acceptance of digital rupee at its merchant outlets. Kotak Mahindra Bank also announced that it has rolled out the CBDC facility to a close group of retail consumers and businesses.
In a digital world, paper currency cannot be an exception; and, hence, central banks all over the world are finding ways to switching to digital currency. Digital currency is essentially a replacement of conventional paper currency by currency in the form of digital data on a technology-based platform on a mobile device or otherwise.
Generally, CBDTs are divided into two categories: designed for use by financial institutions and for use by general public. The first one is a way of transfer of funds by the central banks to other commercial banks. Such pilot projects are going on by New York Fed and other big US banks. The second type is a digital version of fiat money made available to general public through the accounts held by them in a commercial bank. The Governments of China and India are trying this experiment where people are allowed to transact with the digital version of their currency.
The major benefits of CBDC are lesser dependency on cash, lesser currency management cost, lesser settlement risk and provision of an electronic form of legal tender money to the people and business organisations with safety and liquidity. On the other hand, the CBDC poses certain risks that may have a bearing on important public policy issues such as risk to financial market structure, monetary policy, financial stability and the cost and availability of credit. However, the threats and opportunities are hypothetical till now and time will tell the result. A debate is going on, but it seems that CBDC is inevitable whether a country is ready or not.
In India, the biggest consideration for CBDC is the cost of cash management. As per the government records, the total expenditure incurred on security printing during April 1, 2021 to March 31, 2022 was ₹4,984.80 crore as against ₹4,012.10 crore in the previous year (July 1, 2020 to March 31, 2021) excluding the Environmental, Social, and Governance (ESG) cost of printing money. The four stakeholders who bear the cost of printing are general public, businesses, banks and the Central Bank. Introduction of CBDC can reduce operational costs like printing, storage, transportation and replacement of banknotes and costs associated with delay in reconciliation and settlement.
Though the initial expenditure seems high, subsequently the operating costs will be low and environment-friendly. Digital payments increased in the country after the pandemic and CBDC can provide another option for furthering digital payments. Financial inclusion is another major criterion for introduction of CBDC as it can overcome the difficulty of remote unbanked and under-banked populations of the country in assessing easy availability of credit facilities.
The crypto assets possessed by people are a threat to the country as it creates a parallel economy with a least-controlling authority. The CBDC can provide the people a risk-free virtual currency without volatile values safeguarding their trust.
The success of CBDT will depend on technology, governance and cyber security which ultimately help in achieving the desired result. To fulfil the financial inclusion objective, CBDT should extend its applicability in offline mode also. Cross-border payment, strong cyber security, ability to utilise the current payments infrastructure like UPI and digital wallets will further enhance the applicability and acceptance of the CBDT.
(Dr Biswal is Principal, Nowrangpur College, Nabarangpur-764063.
Mob: 9437125286, bhaskarnathbiswal@gmail.com)