The Indian government’s annual presentation of its budget to Parliament is one of the most important dates in the country’s national calendar; any policy change reverberates across the entire economy and affects the lives of more than a billion people. But Finance Minister Nirmala Sitharaman’s speech this month included a new direction of global significance that has received surprisingly little attention either at home or abroad.
Specifically, Ms Sitharaman announced the pilot issue of a digital rupee in the coming year, placing India at the forefront of Central Bank Digital Currency (CBDC) adoption, right behind China. The sparseness of details provided in the budget speech may have subdued reactions, but there are useful guideposts in the statements and policies put out by senior Reserve Bank of India (RBI) figures over the past two years.
The RBI’s response to the philosophical questions that the CBDC design process stirs up is fairly conservative and these views are now literally encoded into the architecture of the Indian digital economy. The RBI, for example, is firm in its belief that banks must remain the cornerstone of the national financial system and that the firm use of regulations to manage risk is more important than ever before. But ironically, the high level of technocratic and political consensus over the defence of traditional monetary principles means that India can move ahead faster than many other more technologically advanced or wealthier states.
It is worth noting that none of the G7 economies are as close to a CBDC rollout as India and China, even though the Bank of England coined the very term back in 2015 as part of its pioneering conceptual work. This indicates the depth of disagreement at elite levels within the West over issues of individual privacy versus state surveillance, regulation versus laissez-faire, and of continuity versus disruption.
But the government of India’s moves on the CBDC front appear to have defensive origins, closely linked to worries over rapidly increasing Indian consumer dabbling with Bitcoin and other private cryptocurrencies. The RBI and the Ministry of Finance have a particularly harsh view of crypto, calling for their outright ban in 2019.
The “Cryptocurrency and Regulation of Official Digital Currency Bill” was due to enact this ban this winter, but the government appears to have decided to pause and consult more widely before moving forward.
Crucially, the bill is also intended to create the legal framework for the digital rupee. The linking of the crypto ban and the introduction of the rupee indicates the extent to which the RBI and Ministry of Finance regard private crypto and the digital rupee as zero-sum competitors within the Indian economy.
The concerns appear to be threefold. First, there is the belief that it is their duty as regulators to protect Indian citizens from self-interested promoters who gloss over crypto’s extreme volatility. Second is the concern over anonymity and the likelihood of tax evasion and the expansion of the untraceable “black” economy. Finally, there is the potential to enable unregulated cross-border capital movement.
In this regard India appears to have far more in common with China than with western governments. The pilot launch of the digital yuan last year was also accompanied with a ban on private crypto; the Bank of Russia has also publicly announced its intention to pursue a similar pathway.
These convergences are not surprising. Despite the size and rate of growth of their economies, India and China continue to wrestle with very different basic problems than the West, such as “unbanked” populations measuring in the hundreds of millions of people. The major stated goals of digital currencies, like other digital payment systems, is to reduce transaction costs, increase inclusion and access to regulated financial services.
There is more at stake, of course. The informal economies represent a vast black hole that swallows not just tax revenue but also information, fundamentally limiting the government’s ability to understand or help some of its most vulnerable citizens. Both states also share anxieties about capital flight out of the country, and the potential for unregulated capital influx towards groups or movements that the state wishes to monitor or weaken.
Anxieties about the state’s ability to effectively govern a huge population of low- and middle-income citizens led India, like China, to adopt biometric digital ID in the form of the “Aadhar” card. The implementation of this core piece of digital infrastructure will play a crucial role in rolling out official digital currency at the retail level.
It has been announced that the digital rupee will use blockchain, although most likely with centralised (as opposed to distributed) “ledgers” to record all transactions. While non-state crypto emphasises user privacy and even anonymity, the digital rupee is likely to favour the state’s ability to forensically analyse financial flows. This will excite the national economy’s managers at least as much as bureaucrats concerned with security.
But although India and China share some similarities in approach, the RBI appears to be largely relying on the CBDC guidelines released by the Bank of International Settlements (BIS) in June, 2021. The RBI has, for example, embraced the recommendation to use digital ID-based accounts rather than anonymous tokens, and to introduce separate digital rupees for inter-bank settlements and for retail consumers. Most importantly, the BIS’s philosophical viewpoint chimes with that of the RBI – that private crypto is a form of speculation rather than currency, and the central banks have a responsibility to act to protect the sovereign role of their national currencies.
The enthusiastic pursuit of 21st-century technology while embracing 20th-century belief in the primacy of the state is jarring to those who see innovation in terms of transformations in values, not just technologies. But the depth of polarisation within the West when it comes to choosing the 21st century’s values has created opportunities for others to take the lead. Historically, these moments of eclipse have often spurred the West on to embrace radical change. The world will not have to wait long to see if that history repeats itself.
