Digital Economy

Context:

• The Reserve Bank of India (RBI) recently launched the pilot for its digital rupee — India’s very own digital currency.
• The pilot covers select locations in a closed user group (CUG) comprising about 15,000 customers and merchants across the country such as Mumbai, New Delhi, Bengaluru and Bhubaneswar.
• So far, four banks — State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank – are part of the first phase of the pilot.

E-RUPEE Project:

• Central Bank Digital Currency (CBDC) or e-rupee is an initiative of the RBI.
• The CBDC is legal tender issued by the RBI in digital form, which can be transferred electronically from one holder to another.
• It is the same as a fiat currency and it is exchangeable one-to-one with government-issued money.
• Simply put, the digital rupee is the same as a banknote or coin that we use daily, only it is in a digital form.
• E-rupee will be issued in the same denominations as paper currency and coins.
• It will be distributed through intermediaries, i.e, banks.
• To send or receive digital money, a digital wallet is a must.
• Users can link their wallet to their bank accounts and load them and use digital money for individual payments or at the merchant shops.
• These digital wallets offered by the participating banks are stored on mobile phones and devices.
• E-rupee transactions can be both person to person (P2P) and person to merchant (P2M).
• For P2M transactions, such as shopping, there will be QR codes at the location.
• Users will be able to withdraw digital tokens from banks in the same way they currently withdraw physical cash.
• Users will be able to keep the digital tokens in the digital wallet
• These digital tokens can be spent online or in person, or transfer them via an app.
• Like a person making a cash transaction above a certain threshold needs to submit his or her PAN. The same rule will apply to the digital rupee.

Significance/Objective

• Faster since it requires no intermediation of banks. Providing instant transfer of funds for the customer.
• No requirement of settlement for the banks or ecosystem participants
• Saving on cost of printing, transporting and storing currencies and coins that can be rationalised through e-Re.
• Financial inclusion and formalising the digital consumption of money.
• E-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card.

Difference between E-rupee and UPI:

• Digital rupee is a store of value like currency, while UPI is just an overlay infrastructure on top of any form of store of value like bank accounts (which have normal currency), prepaid instruments, credit cards, etc.
• No intermediation of banks – UPI or NEFT or RTGS must go through a bank while in the case of the e-Rupee, the money gets transferred from one wallet to another
• Anonymity – The transactions via digital rupee are more anonymous than the current digital transactions including UPI, NEFT, RTGS (can be easily tracked since involves intermediary banks)
• Holding limit – SBI has allowed Rs 1 lakh holding limit for the wallet while upper limit per UPI transaction is Rs 2 lakh.
• Process – When we pay in UPI, the amount is deducted from bank account, while on payment using e-rupee, the amount is deducted from digital wallet.
• Settlement risk – exists in UPI since it works on settlement basis between two banks and at the backend it takes about a day for settlements among banks to conclude.
• Cheaper – e-Re usage of cash does not involve any charges. UPI is free now, but could become chargeable going ahead.

Issues in E-rupee:

• Anonymity – In digital currency, even though the transactions are recorded in the centralised ledger, it is anonymous as the owner of the wallets are not known to the government or intermediaries in the ecosystem

• While UPI is a bank-to-bank payment mode, there is a transaction or audit trail it leaves.

• Cannibalisation of UPI – UPI works on a settlement basis between two banks; at the backend, it takes about a day for inter-bank settlements to conclude. Hence there is a settlement risk in UPI
• Delay in transactions – If there is a delay in a transaction or if it fails, customers prefer paying using other digital payment modes, which are currently faster
• Practical problems – A customer who paid using e-rupee is later unable to make the CBDC transaction
• Success depends on Acceptability by large and reciprocal number of users.
• Established ease of use of UPI – From a customer perspective, whether merchant or retail, UPI has established ease of use. Therefore, e-Re needs to prove that it is equally user-friendly with sound technology and data privacy provisions, to lure users.
• Digital theft such as hacking and virus attacks, which could deter some people.
• Cultural and social mind-set in the country, which leads to greater use of physical currency, is also a hinderance.

Measures to enhance digital economy:

• Digital infrastructure and connectivity including regular maintenance and upgrades

• An improvement of just 6% on connectivity will cover more than 99% of the population with at least 3G services.

• Securing and maintaining the infrastructure
• Policy changes – evaluate existing policies and practices to reduce conflicting regulatory roadblocks that impede the growth of the digital economy.

• continue to improve data accessibility and relax data localization policies
• World Bank’s Ease of Doing Business ranking must be continuously improved, particularly in reducing red tape and encouraging cross-border trade

• Skilling and capacity building – upskilling its labor force and improving the quality of education at all levels
• Improving the quality of digital services will require action and cooperation from both the private and public sectors.
• Structural reforms such as a reduction of 40% in the market entry barriers to FDI in infrastructure, an improvement of 13% on the indicator for FDI regulations, and improvement of 43% in market competition in the e-retail sector can facilitate market competition across industries and help India close the gaps with the G20 median, unlocking inclusive digital economic growth.
• Increase in access to e-payment platforms by 17% will help close the gender and urban rural gaps, facilitating digital development among hard-to-reach and less-developed regions.
• Participation of private sector – For example, Reliance Jio’s strategy of bundling virtually free smartphones with mobile-service subscriptions has spurred innovation and competitive pricing.

• Data costs have plummeted by more than 95 percent since 2013
• As a result, mobile data consumption per user grew by 152 percent annually—more than twice the rates in the United States and China

Way forward:

• The digital economy can contribute up to 20% or $1 trillion of India’s $5 trillion economy vision.
• But in developed countries, they have been spending ~1.2% of their GDP on digital infrastructure.
• The Indian government too needs to acknowledge digital infrastructure as a fundamental transformational area and give it the same importance it gives to physical infrastructure, where 80% of its investment goes.

Source Indian express