Just think about this situation. It is eight o’clock in the evening, and an announcement has been made that from here on out, all rupee notes are being withdrawn and replaced with a digital currency called CBDR, which is short for Central Bank Digital Rupee. People need not panic and have a week to go to the branch of Reserve Bank of India (RBI) or any public sector bank and exchange all their currency for Digital Rupee. No questions will be asked. An account will be opened with RBI, and based on one’s Aadhar card and PAN card details, the amount will be automatically transferred for access through a registered mobile phone. The transaction will take just a few minutes and one can exit the branch with the amount loaded on their handset. Does it sound awesome? It may sound like that, but it’s a believable possibility.
Such a scenario is likely raised by active talks in various countries including India to launch a central bank digital currency (CBDC) that would make it easier for us to take and use money. Some left-wing economists would object to calling it Orwellian or Kafkaesque and explicitly dystopian. There are at least 500 million people in India who do not have access to a smartphone (Statistica reports 845 million phone usage in 2021). A large number of people have neither an Aadhaar nor a PAN card, or even if they do, are not in the habit of using phones except to make calls. Many of our senior citizens have already been duped by online scamsters and will be in a spin with CBDR.
However, progressive right-wing economists would probably say that this is the way and it is happening everywhere, and that we should not shy away from technology. The elderly and the poor must adapt to this new system and if they do not do so it will be bad for them.
We had heard similar views during demonetisation in 2016 and hence one can expect CBDR discussions on the above two arguments.
What exactly is a CBDC? When central banks convert paper currency to the digital version, it will be called a CBDC. This will happen officially and will not be powered by the crypto craze or the more systematic e-wallets around, although the concept is the same. Today, we swipe our phones to make payments through various wallets, which can be private or UPI-based. Money is withdrawn from our bank account or kept in these exogenous wallets. So, what exactly is the difference?
The distinguishing factor is that The currently existing 30 trillion currency will be sent to the burner and transferred to our digital accounts. It has to be managed by the central bank otherwise it will be similar to e-wallet money, the cost of which is attached either in the form of direct charges or loss of interest on the balances held with the facility. Clearly, RBI cannot insist that a digital rupee be kept with banks or in e-wallets. Actually, RBI could encourage people to adopt it by paying around 1-2% interest.
The benefit of paper abolition for the government would be that every rupee can be traced in the country, as opposed to the currency currently held by our population. This means that if we spend heavily and pay cash for the wedding party, it can be tracked by the tax authorities. Even cash gifts will have to be digitized. The same would be true for the cash paid for the property; Real estate developers often take cash because they have paid for clearance or land in cash. So the system will be clean.
It would also be an infringement of privacy, as every monetary action of ours can be tracked by the taxpayer, be it frequent visits to a high-end restaurant or beauty parlor. Problems will arise if the counterparty has no account of the payment (eg, say, a beggar). The judiciary will have to be consulted on this, as there are privacy issues involved.
If tracking transactions is not a purpose, what could be a greater purpose than that? A fraudulent argument is often made that this will save on the cost of printing the currency. The annual cost of printing notes for RBI is around 4,400 crore, while its total income is approx. 1.5 trillion. Therefore, cost is not a factor. Another argument has been made that it helps in government transfers to the needy, such as PM Kisan Yojana, rural employment guarantee, etc. But the government has already opened about 440 million Jan Dhan accounts for India’s needy, so a system already exists. for such transfers. Do we need another vehicle?
All consequences must be considered, even if one discounts the disruption at the individual level. The first is that the entire financial system can go into a spin. Payment banks would have to be closed, as savers would have to maintain accounts with the RBI anyway. The UPI system would be redundant. Even commercial banks will see people withdraw money from savings deposits and perhaps opt for fixed deposits at higher rates. Regular accounts are served as cash anyway, although they often also have restrictions on withdrawals. It would be prudent to eliminate these accounts. ATMs will surely have to be shut down, and the industry with its security guards and cash hawking companies will disappear.
The second major challenge for our central bank will be technology disruption. Hackers will be at risk. We still hear about technical glitches in banks, which are closed for maintenance on holidays.
Paper cash has always been the last resort for transactions. But what if there is no paper cash?
These are personal views of the author.
Madan Sabnavis is Chief Economist, Bank of Baroda and author of ‘Hits and Mrs: The Indian Banking Story’.
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