February 3, 2022
Good morning. In today’s either/view, we discuss whether a digital rupee makes sense for a country like India. We also look at the importance of Meerut in the upcoming elections in Uttar Pradesh, among other news.
📰 FEATURE STORY
Delving into the Digital Rupee
The new Union Budget just dropped, and people have feelings. Ranging from enthusiasm for the apparent growth-heavy declarations to woeful cries for the middle class, we’re pretty sure you’ll be noticing more of these ‘feelings’ pop up. Amid all the name-calling and counterpointing, we’ve even gotten our lesser understood friend made of 1s and 0s – digital currencies – shoved into the conversation.
Our Finance Minister Nirmala Sitharaman, while presenting the budget, threw quite a turbulent fact in the mix. The RBI will soon be introducing India’s very own digital currency. While the details of the digital rupee are yet to be announced, investors have gone on to split themselves into two opposing camps. One side, sure that this will increase both revenue and efficiency. The other? Well, they’re a little more cautious about treading into uncharted waters.
Context
After a lot of humming and hawing about crypto in India, the government finally took their insinuated but official stance on the matter this Tuesday. FM Sitharaman, during her budget speech, proposed an amendment to the Reserve Bank Act, 1934. This will legitimize the Reserve Bank of India’s digital rupee as legal tender, expected to be launched in April.
Right, so what’s a digital currency? The simple answer: it is a centrally-backed cryptocurrency, commonly known as a Central Bank Digital Currency (CBDC). These CBDCs are basically fiat currencies, i.e. legal tender, in code. This is what makes them different and, according to some, more legitimate than regular cryptocurrencies.
Regular cryptocurrencies do not rely on any state or central bank to authorise their value. What keeps these currencies stable is the technology underlying them – the blockchain. A blockchain is simply a decentralised system that records and manages transactions. And all those records are permanent. The technology itself does not allow any tampering with records. This is what our digital rupee will also be running on.
And what happens to the other not-centrally-backed cryptos? Well, they’re still here and thriving. According to FM Sitharaman, other cryptocurrencies will now be treated like assets instead of actual currency. This means that every profit made through crypto transactions will be taxed at 30%.
Till now, only 9 other countries have properly adopted a CBDC. The Bahamas were the first by launching their Sand Dollar in October 2020. Quickly followed by Nigeria with their e-Naira and the island nations under the Eastern Caribbean Central Bank use the bank’s DCash. The latest addition to the crypto club was China, soft launching its digital yuan just last month, even after its trials that started in April 2020.
It’s fast, safe and worth it
Since demonetisation in 2016, the government has been actively trying to push India into the digital world. Especially when it comes to our finances. Whether it’s about tracking transactions for tax purposes or simply cheap currency management, the digital rupee could do wonders for the economy. As Digital Payments Strategist Ram Rastogi put it, “A successful implementation of the digital currency would not only curb black money but would also counter the craze for private cryptocurrencies”. Something the RBI has been trying to do since news of private crypto users existing in India broke.
According to a report called “India’s $1 trillion Digital Asset Opportunity”, India is qualified to take on the adoption of a digital currency just based on demography alone. Out of all the reasons the report cites, the most relevant is that we have a “natively-digital” population. India also has a significant developer base, around 2.8 million in 2020, and is expected to steadily grow in the coming years. This basically means that we won’t have to spend a long time teaching consumers about digital finances. About 76% of our transactions in 2021 were done digitally. A CBDC would just make this easier.
But keeping Indian sentiments aside, it is necessary to look into why private cryptos are so volatile. The nature of blockchain basically expects developers to subject themselves to the honour code to not scam people. Which, given how difficult it is to track anything on decentralised tech, is simply based on optimistic naivete.
A CBDC, on the other hand, takes everything good about crypto, its efficiency and lack of middlemen, and adds a stabilising force to it, a central authority. It also decreases settlement risks in financial transactions as you no longer need to run your money through several different organisations. It’s a more direct process. In fact, just looking at how much money we won’t have to print and waste resources on should be enough to get people on board.
It’s too new and unpredictable
Considering many see digital currencies as the next major step in economic evolution, several countries, including the USA, UK, Sweden, etc, are also looking into CBDCs. But as practically lucrative the offer might seem, there’s still a major point holding them back. We’re talking about privacy. In China, officials have attached the term “controllable anonymity” to digital yuan transactions. This means that while transactions might be anonymous to the participants, the central bank has full access to all the data that comes with moving money.
Professor Rohan Grey describes this as a monetary system where transactions are stored as data that can be used to create a social graph of a given nation. While he was specifically talking about the United States, the situation wouldn’t be too different in India either. Now, we know that the government is pushing digital money to curb the shadow economy. The only way this makes sense is if the administration is willing to track these transactions, and given their “autocratic tendencies”, this doesn’t seem too outlandish an assumption. All of this mixed in with our lack of a proper data protection system simply shows how hastily this change is happening.
Another point that reports in favour of the digital rupee tend to gloss over is that, despite our high number of digital transactions, India still has severely low financial literacy. While our literacy rate is about 77%, financial literacy remains low at 24%. Now, trying to get everybody, and that includes people outside metros, is sure to be a herculean task. Rushing into a CBDC might just be too much for us to handle.
Given that we are still unaware of the RBI’s specific rules and regulations for the digital rupee, banks are also stressing about how this will impact them. The only reason banks are as important as they are today is that transactions happen through them, even if digital. Taking the middleman out, as is promised with the launch of the digital rupee, will increase the banks’ costs of raising deposits. This could eventually lead to them reducing credit. All of this significantly affects the one thing we’re all looking for – financial stability.
What’s your opinion on this?
(Only subscribers can participate in polls)
a) The digital rupee will eventually be good for India.
b) The digital rupee will eventually turn bad for India.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
Hindutva Is Running Into Difficulties
For the Left:
Sidhu or Channi: What Congress’s Choice Will Tell Us About the Party
🏴 STATE OF THE STATES
Importance of Meerut (Uttar Pradesh) – As the state gears up for the upcoming polls, the city of Meerut has importance and significance to the campaign. The city will go to the polls in the first phase. Several high-profile politicians like Chief Minister Yogi Adityanath and Prime Minister Narendra Modi make frequent visits to the city. Ahead of the 2019 general elections, Modi began his campaign for the Hindi heartland in Meerut. His most recent visit was on January 2 to lay the foundation of a world-class sports university.
Why it matters: The city is a traditional stronghold of the Jat community. Muslims make up 34.43% of the city’s population and have been vulnerable to communal politics. The city has a controversial and violent past concerning communal violence and riots. In the wake of demonetisation, small and medium traders in 2017 deserted the BJP and switched to the BSP. The Jat community is politically powerful and even more so after the farm protests. The BJP is countering this by wooing the Gujjar community in the city.
Vehicle sales (Karnataka) – The pandemic has impacted vehicle sales in Karnataka. While two-wheeler registrations have declined by 35.6%, car sales have increased by 3.8% between 2018 and 2021. In 2020, registrations for both saw a steep decline of 24% and 10%, respectively. Bengaluru accounts for more than 50% of vehicle registrations. Since the pandemic affected the poor and middle class the hardest, two-wheeler sales have dipped. On the other hand, upper-middle-class households are opting to buy cars to avoid public transport.
Why it matters: As the pandemic hit, people started working from home. Thus, the desire to buy two-wheelers reduced. Their costs have also increased post the introduction of the BS-6 norms. Input costs of copper and aluminium have increased. Add to this, rising fuel prices have made people rethink or delay their purchases. With job losses due to the pandemic, people aren’t able to buy two-wheelers. Due to its low resale value, switching to another two-wheeler isn’t an option like it is for cars.
Disaster-proof power infrastructure (Odisha) – The state has asked the Centre to allocate ₹25,000 crores for disaster-resilient power infrastructure. Given the coastal areas of Odisha are vulnerable to cyclones, the state wants to ensure that damages to electrical infrastructure are at a minimum. The state also wants to include private distribution players under the Centre’s power reforms scheme. It also wants aid to set up new power projects in Upper Indravati, Balimela, and Upper Kolab.
Why it matters: Cyclones are an annual occurrence in the state and cause extensive damage to property and livelihoods. Between 1891 and 2021, more than 100 tropical cyclones have hit Odisha. When cyclone Fani hit in May 2019, the state’s power sector suffered losses worth ₹8,138 crores. Thousands of kilometres of power lines were snapped, throwing many parts of the cyclone-affected areas into darkness for more than two months.
Ex-gratia claims (Maharashtra) – The BMC has approved more claims of ex-gratia for COVID-19 victims than the official death toll. The government expects the approved claims to be more than the official toll. Additional chief secretary Dr Pradeep Vyas said the expectation is that there will be a 10% increase in approved claims. An official said the state has a liberal compensation policy. For example, even if a person committed suicide within a month of suffering from Covid, they are eligible for compensation.
Why it matters: There’s always been talk of actual cases and death counts related to the coronavirus in various states. Officials said the number of applicants for compensation isn’t an indication of a rise in final numbers. For example, the Nagpur Municipal Corporation received over 12,000 applications against 6,055 deaths. Epidemiologist Dr Chandrakant Lahariya said it is understandable that the number of actual deaths would be higher than official deaths. She also said ex-gratia should be liberal.
Poor performance of schemes (Arunachal Pradesh) – While chairing a review meeting on schemes for the agricultural and horticulture sector, Chief Secretary Naresh Kumar was not satisfied with the progress of the Atmanirbhar Krishi Yojana (ANKY) and the Atmanirbhar Bagwani Yojana (ANBY). He blamed banking institutions for delays in sanctioning loans to beneficiaries. The two credit-linked schemes were launched by the state last September. They included government subsidies and bank credit.
Why it matters: Per the latest data, bank loans sanctioned under ANBY were 1,090 against 3.598 applicants. For the ANKY, sanctioned loans were 161 against 2,182 applicants. When the schemes launched, each had a budgeted outlay of ₹60 crores. The components are 45% govt subsidy, 45% bank loan, and 10% borne by the farmer. The goal is to help farmers and Self Help Groups. The credit link is provided to beneficiaries by SBI, Arunachal Pradesh Rural Bank, and Arunachal Pradesh Cooperative Apex Bank.
🔢 KEY NUMBER
16 – The number of women fighter pilots commissioned into the Indian Air Force. What was started as an experimental scheme will now become a permanent one, according to Defence Minister Rajnath Singh.