TOKYO – China wasn’t a big talking point on Tuesday (February 1) when Indian Finance Minister Nirmala Sitharaman announced plans for a digital rupee.
But the huge head-start enjoyed by Asia’s No 1 economy is written between the lines in bold font as the region’s No 3 financial power jumps on the e-currency bandwagon.
The same week New Delhi shared plans for a central bank digital currency, or CBDC, Beijing was gearing up for its biggest trial yet at the Winter Olympics, which start on Friday.
The Reserve Bank of India (RBI) is joining the People’s Bank of China (PBOC) in part because the trajectory of global money demands it. The Federal Reserve, Bank of Japan and Bank of England are also pivoting toward digital currency units.
Yet India needs an e-rupee more than most economies need a digital currency for at least four reasons: to take on corruption; turbocharge remittance flows; give the RBI great economic traction; keep pace with China’s fast-rising financial influence.
Sitharaman’s announcement didn’t come out of nowhere. In February 2021, India’s parliament introduced a bill to “create a facilitative framework for the creation of the official digital currency.”
Months later, RBI Governor Shaktikanta Das claimed India was “very much in the game” along with 87 other governments exploring the mechanics of a CBDC.
That, noted Josh Lipsky at the Atlantic Council GeoEconomics Center, equates to nations “representing 90% of global GDP.” To put things in context, only 35 countries were considering a CBDC in May 2020, when Lipsky’s group was building its e-currency tracking system.
Until now, Indian Prime Minister Narendra Modi’s team moved as glacially on a digital rupee as it does most areas pertaining to financial innovation. But arguably no top 10 economy could benefit more from de-emphasizing, or phasing out, paper money.
It could increase efficiency in a uniquely cacophonous and multilayered financial system, reducing tax evasion and opportunities for graft. It also could pull hundreds of millions of unbanked Indians into the real economy.
Most importantly, a CBDC that doesn’t need to be exchanged, stored or physically transported would be a Big Bang reform all its own. It would, in one fell swoop, cut untold millions of middlemen and women out of the process, while eliminating myriad levels of rent-seeking opportunities.
In 2016, Modi tried his hand at upending India Inc with a sudden ban on high-domination bills. By forcing 1.3 billion Indians to exchange older notes for new ones, Team Modi calculated suitcases filled with “black money” would have to step into daylight for tax authorities to see – or eat huge losses.
Just like that, India’s massive shadow economy would be chastened.
The result, though, was pandemonium. The chaos cratered the money supply, slammed national growth rates and generated a spike in suicides. An e-rupee could’ve avoided the entire fiasco while achieving the results for which Modi’s experiment hoped.
When Modi’s premiership started in May 2014, he inherited the 85th place ranking on Transparency International’s corruption index. India’s grade is still 85th, meaning zero progress during his tenure.
With the introduction of an e-rupee, the opacity and anonymity that crooks, tax cheats and terrorists use to do their worst would essentially disappear.
So would the exorbitant fees that plague India’s vital remittance economy. Of course, it would be better if Modi fulfilled his pledges to create scores of good-paying jobs so tens of millions of Indians didn’t have to work abroad and send salaries back home.
India is the world’s most remittance-reliant economy. Even with the pandemic devastating world growth in 2020, India still raked in more than US$83 billion in such payments from abroad. It’s one of the rare global league tables on which India routinely tops China.
Yet the economic spillage from high fee exchanges by remittance companies and unscrupulous moneychangers reduces amounts received by families and diminishes the cash infusion’s GDP boost. Imagine the efficiency of one central bank currency routing cash to another – easily, instantaneously and transparently.
An e-rupee also could make life easier for Das and his team at the RBI. In a world where quantitative easing is the norm, central banks are having problems influencing demand for money with conventional policy tools.
India, of course, has added problems: mountains of bad loans in the state-bank sector are hobbling the entire credit system. Yet from Sydney to Tokyo to London, researchers are positing that a digital currency would make it easier to reach and break through the so-called “zero lower bound” barrier.
As global markets become more sophisticated, financial innovation races ahead, stock and bond dealing moves from trading pits to apps and algorithms, and news sources become more segmented, central bankers are finding it harder to steer mass psychology the way they once did.
A digital currency controlled by a central bank could turn the tide. It would effectively give policymakers an extra gear to reach the zero lower bound level of influence. The RBI could make great use of digital tools to influence the behavior of everyone from wealthy CEOs to low-income families.
Finally, India needs to step up efforts to close gaps between its economy and China’s wherever it can. Like President Xi Jinping’s China, Modi’s India has more often clamped down on private cryptocurrency dealing than tolerated it.
Yet the PBOC’s enthusiasm for an e-yuan made eminent sense. The trajectory of money is zooming away from notes, coins and old-school payment tools at bewildering speeds. Central banks can either influence the way the market is headed – or lose all control of financial systems in the not-so-distant future.
Beating other major economies to a CBDC lets Beijing get to play an outsized role in rewriting the rules of money for generations to come.
The RBI is wise to join the Fed, BOJ and BOE in playing a role in devising the systems for global payments and finance. That goes, too, for the rules for fintech startups that lead the next wave of banking.
Even better if all this modernizes and internationalizes India’s economy in the process.
Follow William Pesek on Twitter: @WilliamPesek
