Govt’s focus on ‘Digital’ paves way for new India
05 Feb 2022
Union Budget 2022 is an illustration of the government’s bifocal vision. It has proposed several growth-enabling measures for the near term and announced a blueprint for a future-ready India over the next 25 years. Emphasizing that digital will be fundamental to India’s Amrit Kaal, this Budget has showed a decisive focus on digital initiatives to put India at the center of the global technological revolution.
Condensing the power of technology on our fingertips, India Stack has enabled 2.8 billion of monthly real-time mobile payments, and Rs. 5.47 trillion real-time payments. In fact, the latest Economic Survey notes that United Payments Interface (UPI) has become the single largest retail payment system in the country, having processed over 30 billion transactions in FY2022 already.
After the widespread reach of UPI, India Stack, in its next act, has built an Account Aggregator framework to facilitate secure and efficient way of financial data sharing. This move will significantly alleviate transaction costs, improve risk management practices, and offer the cost benefit to customer. It will also transform the digital lending landscape by facilitating an Open Credit Enablement Network.
Continuing this tradition of innovation, the recent budgetary measures draw a roadmap for further expansion of fintech ecosystem, including the launch of a Central Bank Digital Currency (CBDC), a bold step that can create an unmatched digital leadership position for India.
A surprising, albeit welcome, move by the government was introduction of CBDC. With the emergence of blockchain technology and cryptocurrencies, global economies have been exploring CBDCs for couple years now. However, China has been the only country to make the move, while also suppressing cryptocurrencies. India, however, has struck a balance at least for now. On one hand it announced the launch of a CBDC and on the other indicated acceptance of cryptocurrencies as an asset by levying a 30% tax on its transactions. This move has certainly provided clarity and insight into the government viewpoint on crypto and should support the growing community of companies and investors. While the Crypto Bill will provide greater clarity on this booming sector, this is a good starting point.
The launch of CBDC aligns well with government’s development vision for the next 25 years. With digital increasingly becoming a pre-requisite for growth, a digital currency may become the key mover of global economy in the decades to come.
It will undoubtedly change the game for a system that has become heavily reliant on digital transactions by easing transactions, reducing cost, and transforming payments with instant settlement. It can facilitate higher government oversight, prevent illicit use of funds, and bring complete transparency, considering a digital currency by its nature will always have an electronic trail.
While the immediate reaction has been that of widespread celebration, there remains ambiguity on what this CBDC will look like in action. For instance, with greater government oversight, comes concerns of individual privacy, creation of credit in the economy becomes challenging considering RBI will be the primary holder of the currency at least initially. The industry will keenly watch out for the rollout framework for this currency and how it will be brought into the retail mix over a period.
Financial inclusion has emerged as a clear priority for the government. Empowered by people’s comfort in transacting digitally, the government has proposed setting up of 75 digital banking units in 75 districts by scheduled commercial banks and connecting all 1.5 Lakh post offices to the Core Banking system in 2022. While the digital banking units will improve access of banking services in unbanked regions, the latter will facilitate interoperability between post office and other banks while promoting digital transactions.
The pandemic has normalized the use of digital for monetary transactions and so, the digital banking units seem like a natural progression for the government to reach the interiors of India to serve the unbanked population. In the longer term, this will bode well for other financial products like insurance, as these digital banking units could serve as distribution mechanisms. However, clarity is awaited on what these digital banking units will constitute and how they will serve the intended population.
Overall, this Budget will not only boost the economy, but also make way for use of newer technologies in innovating existing products and service as well as supply chain mechanisms. While there is some ambiguity on what these measures will look like in execution, there is none regarding Government’s digital priority.