6 Transformative Aspects of the Digital Rupee 

When it comes to banking and financial services (BFSI), one proposal in Budget 2022 with the most far-reaching impact is the watershed proposal to introduce the Digital Rupee. Various aspects of Central Bank Digital Currency (CBDC) are reasonably well-documented. At the same time, many transformative aspects of the Digital Rupee in the radically altering financial landscape, will only unravel over time. It’s certainly not too early to try and draw the broad contours of the coming transformation. Here are my thoughts on six important aspects.

The matter of acquisition The introduction of the Digital Rupee is likely to happen in phases and after pilot projects, possibly like the Digital Yuan in China. It may well take some years for it to effectively get implemented. An important question would be how easy will it be to acquire it. The key would be the details that would emerge from the RBI which would also influence the Digital Rupee’s adoption.  

Question of adoption Another question about the Digital Rupee would be how seamlessly Indians would be able to move from the physical to the Digital Rupee and vice-versa. While it is not practical, will there be any effective limitation of holding the Digital Rupee? If not, this is likely to have profound implications for banks. 

Issue of impact on banks For centuries, people parked money in banks as deposits. This was, in turn, lent by banks to business, trade, individuals, among others. Since Digital Rupee is going to be well, digital, safekeeping and its role as a credible store of value– which all currencies are supposed to be–will not be an issue. 

A significant amount of money being held in Digital Rupee, especially quantum of money if moving out of banks, will leave banks with lesser funds to lend. This could have an impact on their financial muscle besides their ability to carry out many of its fee-based activities that typically add to their profitability. In other words, can the Digital Rupee box up the size of Indian banks and their traditional role in finance? 

Monetary supervision Monetary authorities like the RBI, have monetary policies which typically operate though the levers of the banking system. If a significant amount of cash effectively lies outside the banking system, how does India’s money management evolve and adapt? And how does one get to ensure policy transmission for digital currency parked in non-banking financial companies (NBFCs) and in mobile apps of FinTech and digital finance companies?

Promise of financial inclusion  One popular argument put in favour of digital currency is that it is likely to foster greater financial inclusion. The question is how will the currently unbanked effectively get access to financial services? To put it another way, given the efforts already made towards financial inclusion, what new benefits will the Digital Rupee offer that will help the population excluded from banking and financial services to enter the fold? 

Question of privacy Would the government and other authorities be able to track the use of the Digital Rupee and if so, what would be the ticket size? My sense is that the greater the surveillance, the less popular it would be for those who regularly use cash such as those in the informal sector, many small businesses and trade, among others. Of course, it goes without saying that the security features of the Digital Rupee would need to be iron-clad since trust is the cornerstone of any currency.  

In the days to come, we will hear more and more about these and many other aspects of the Digital Rupee. The announcement of its introduction reminded me of Victor Hugo’s oft used quote: “Invasion of armies can be resisted, but not an idea whose time has come.” 

The Jagged Curve That We Will Ride As COVID-19 Curve Flattens

If it had been a human being would the COVID-19 virus been a crooked magician much like the Joker in the Batman series? As another turbulent week of humungous human suffering and loss ended, strangely I am kind of fixated on an incident last week involving a senior medical administrator in the US.

Overseeing the arrangements of antibody tests in her area, she decided to be the first to test. Her move to inspire confidence backfired as the test results indicated the presence of COVID-19 fighting antibodies in her. In short, she was infected with COVID-19 without every exhibiting any symptoms and her immune system delivered a knock out punch to the virus. The incident indicates just how contagious this infection is and just how difficult it will be to combat it without specific medicinal cures and vaccines. This is even as countries like India and many others try to slowly get out of their self-employed lockdowns to check the spread of the global pandemic.

As India starts its journey out of lockdown, there is no dearth of scenario building, forecasts and predictions. Many of them are dire and grave in content, with many them talking of a radically different world that we will begin living from now on. While there can be little doubt that the next 12 -15 months would be very painful, with major disruptions to our social and economic life, I find it a little difficult to agree to the “brave new world scenarios” painted by numerous bright minds. Even the next twelve months may turn out to be fairly different from what many of us envisage.

Combating ever weaker infection waves Without vaccines that prevent COVID-19 infections and medicines that cure them, all countries will continue to suffer from thousands of cases of infections that will come in waves from time to time in 2020. Some of us will remember how it is to throw a stone in a pond with still water. The ripples created get progressively smaller as waves progress. This will also be the likely fate of subsequent waves of infections. This is simply because people in different countries will now be better informed after the first long lockdown, be more alert and take precautions, seek treatment quickly since symptoms and dangers are well-known. Most importantly, the healthcare systems will be better equipped to deal with COVID-19 patients subsequently. If India manages to reduce the rate of infections and the absolute additional numbers even by May 15 or so, as it seems likely, it would have gained a very important upper hand in its war against COVID-19.

Jagged path to normalcy Despite gaining any upper hand, in India and elsewhere in the world, new bouts of infections will keep disrupting people’s lives. That is also the reason why even if governments gradually lift restrictions, companies and individuals will very carefully and slowly venture back to some of the activities they were involved in before lockdown. So, in the next twelve months only some employees maybe asked by their companies to come to office on some days of the week. There could be multiple shifts instead of fixed work hours. The numbers and durations may increase as people gain confidence.

Restaurants may only be allowed with very spacious seating to ensure social distancing with many of the outlets forced to up the scale up their take-out services. If and when theatres are re-opened, I am sure we will not be bothered by rude people seated nearby talking on their phones loudly. Of course, all this will be allowed with strict social distancing and sanitation guidelines. Non-essential travel, mass entertainment and opening up of secondary and higher education institutions may well be the last to see restrictions lifted even as age-based restrictions such as those for senior citizens are likely to remain.

At the same time, when new outbreaks happen, the areas and their residents, whether in India or abroad, will again go under lockdowns till the tracing and tracking processes get over. So, in the months ahead, we are likely to witness a life marked by fewer physical interactions with other people in our professional and personal networks than in pre-lockdown period. Yet, they will be much more than in the lockdown period. In fact, I feel that we are unlikely to witness the kind of severe lockdown we have are now undergoing in India. But how long would we have to battle the waves of COVID-19 infection?

When the tide turns This clearly depends on when the various efforts to make the COVID-19 vaccine succeeds and when the right drug is found to counter infection. While COVID-19 infection is a new affliction for human race, thanks to the SAARS outbreak in 2002, across the world, be it in the US, UK and Australia, a lot of research had already been done for a vaccine. Work has also been going on in India and China, among other countries. In fact, had it not been disruption in funding to one vaccine project in Texas, US, some years back, some experts in US think that we might have already had a vaccine by now. In any case, given the unusually speedy clearances being given by the notoriously sluggish medical establishments in various countries, one can reasonably expect a COVID-19 vaccine to be available to doctors, nurses, paramedics and other frontline personnel during October, 2020-January 2021. The public is likely to get access to the vaccine 3-4 months after that.

Unlike the experts who are sure of a “brave new world” after the current COVID-19, I am quite sure that a most people will go back to their good old ways once a medical remedy is found for COVID-19.  At the same time, it is likely to take various countries years to regain their economic growth. In any case, economic growth was on a downward slope even before the COVID-19 outbreak and the pandemic just gave a cruel push for the downhill journey.

If anybody has any doubts about my contention, then I suggest a search on the Internet for photos of the 1918 influenza pandemic that killed millions globally. You will find most frontline professionals wearing masks. That was gone in just about a year as nations in the West got into the heady 1920s with the flu behind them. Outbreak for SAARS, Swine Flu and other recent infectious outbreaks didn’t radically alter people’s social and economic interactions even in affected countries. Once danger is out of sight, human beings start feeling invincible. Isn’t that also the reason why funding organisations and governments stopped funding the research in some of the areas?

Does this mean that there will be no lasting legacy of this terrible period in human history? Of course, apart from the human loss, the plunging of millions into deprivation in such a short period of time, there will be lasting changes for many people. But this is not as widespread as experts seem to suggest. Like the Japanese and others in South East Asia, many people in India are likely to pay much more attention to personal hygiene and sanitization. The mask may not just appear during high pollution periods in metros or like the plague scare of 1994 but be part of essential accessories for many urban Indians. More so, for those travelling abroad. These people will also spend more on such products and also factor this in their financial planning by getting insurance coverage for such risks.

Like demonetization in 2016 made many Indians embrace digital payments, even as most Indians merrily continue using cash, large number of laid off people now may find it more convenient to be part of the gig economy and specialized manpower such as those in IT and human resources might insist on work from home options to simply kick out the dreadful time wastage in enduring through hours of traffic jams.

The 1990s hit TV series “X Files” that had two FBI agents investigating mysterious UFO episodes and had a tag line ‘’the truth is out there”. The aftermath of the mysterious COVID-19 pandemic seems to have a similar ring to it. The landscape of the future seems to have features that are familiar to us and yet set to unravel in ways that we can’t anticipate since we are weighed in so heavily by our present. But hey! That’s life, isn’t it?              

Topmost Action Point In India’s Exit From Covid-19 Lockdown: Its Farming

In some hours, we will get to know the next course of India’s self-imposed lockdown to protect itself from the Covid-19 pandemic. For more than three weeks, the lockdown brought to a standstill all economic activity in the country much like more than 100 other countries that have imposed the Covid-19 lockdown. But like any other country, for India too, the lockdown couldn’t have been an indefinite remedy to the Covid-19 malady. In the last 2-3 days, there have been plenty of media reports about how the staggered exit from the lockdown is likely to take place. Clearly, apart from surviving the virus, a country like India, where millions live on the margins, needs to quickly try and kickstart, what seems like a very long journey back to economic normalcy.

This is also coming at a time when some European countries have started to loosen up the lockdown conditions. Spain has announced that it has started relaxing the lockdown conditions, Denmark and Norway did it over the weekend. There has been a lot of talk about the sectors in India that need to be given the preference to restart their operations, albeit in a small scale. Interestingly, there is very little or no discussion about farming. To me, in case of a relaxation of the lockdown in districts without any Covid-19 case or threat, it is farming and activities related to it, that should get top most priority as this sector makes the most compelling case for relaxation.

Coming on the back of a period of broadly stagnating income, most farmers find themselves with good standing crops yet to be harvested. In some cases, this is the only crop for the year. Mess with this and you add to major mess created by the massive numbers of already unemployed migrant workers. To give you a sense of the numbers involved we are probably talking of more than 550 million who depend directly or indirectly on agriculture.

Not that just relaxing farm activities from the purview of the lockdown will be a silver bullet. Farmers are going to struggle to find agricultural workers where they are typically employed. There will also be the issue of supply of important machinery like harvesters which will be available in smaller-than-required numbers and will also need to negotiate border blockages across the country.

If the challenge of timely harvesting wasn’t daunting enough, the produce needs to be procured in the markets where social distancing norms and lack of manpower will again be an impediment. The Indian media has covered very little of the distress in the countryside. To get a sense of what the Covid-19 pandemic can do to agri economy on needs to look at the distressing footages of farmers throwing away their agri and dairy produce in countries like the US.

Clearly, supply of free foodgrains to the rural areas regardless of whether families and individuals have ration cards and other requirements, saving farmers from payouts like interest payments in times of income loss and restart their income flow with direct agri produce procurement, have to be among the critical points in any economic revival strategy in early part of the post-lockdown period. There hasn’t been much discussion on agri-related distress from Covid-19 lockdown because other sectors have been more vocal and typically get sympathetic ears. But make no mistake, if India is to record any kind of economic growth rate in 2020-21 after COVID-19 outbreak, agriculture may just about the best if not the only bet.

Why Nervousness of Rupee's Fate Will Continue for Many Months

Rupee's rollercoaster ride continues. Down yesterday, and today first up down, up... Well, I am sure people will get the drift. Of course, the fear that the rupee will plumb the depths it had some months back is still fresh in people's minds. I have been asked a couple of times in the last two months, especially in a popular radio show, whether I expect a major turnaround in the fortunes of the rupee. My reply has always been been that it is unlikely that it will appreciate beyond Rs 60 to a dollar in the best case and in most days till March-end it will probably hover closer to Rs 60 than Rs 65. I do still believe so. As we move ahead in the remaining part of the financial year, we can expect exports to perk up as US and some European economies recover. If the gold imports remain in control as they have (the unofficial imports i.e. smuggling must be going on), this should be a decent factor helping the rupee. Inflation is unlikely to spike internally (monsoon is behind us) though it can remain stubbornly high at the current levels.That leaves us with US Fed's so-called "Tapering". It is unlikely that anything drastic will be done by Fed real soon. History teaches us that economies recovering after recession triggered off by a financial crisis take long time to recover and do so slowly. The current global financial crisis is no different. It has been six years since 2008. Median wages today in the US are what existed about four decades back and public investment is at the same level as 1947. These are not the indicators of an economy out on a hundred metre dash in the next few months raising inflation and employment levels which the Fed will be eyeing before it begins the "Tapering". Of course, that will not stop people from getting nervous about the rupee since confidence in a currency is also about the confidence in the economy it represents. One has to admit that India's fundamentals need to be fixed. A critical milestone will be the fiscal deficit figure that will be mentioned in the next Union Budget on February 28. Once the world has known that the Government has been able to meet its target (by hook or crook) and also has been able to control the external deficit, which I think it will be able to meet, people will start feeling a little less nervous about the rupee. But that's more than three months away, isn't it? Well, till then, we can expect more of the same.    

Searching for the Bottom

Did people actually buy televisions and other appliances before the festive season began? If you take yesterday's industrial production figures seriously, you would probably conclude so. Consumer durable production has done badly. Whether anyone takes the figures seriously or not, the figures look quite serious with almost all sectors doing badly except electricity. One of the reasons one has to carefully look at industrial production data is because it often has quirks that are not immediately apparent. Thus, it is probably better to see something going on for some months before concluding something is actually happening. Of course, there can be no doubt in anybody's mind that industrial production and industry is doing badly. That has been going on for many months now. Even though people keep looking for signs of a turnaround, there just doesn't seem to be any evidence of it. Very clearly, manufacturers are making adjustments to their production levels, in many cases reducing production, sometimes even shutting down facilities periodically. Even as this happens, adjustment of inventories is also happening. Then, there is the prickly receivables issue where people down the line are grappling with outstanding payments thanks to the tight liquidity conditions. In such conditions, it is not unusual for smaller outfits to go belly-up. We all know that you can be asset rich and have sales going but working capital or shall we say, cash, is the king. It is the lifeblood of business. Suck that out and business first heads for the ICU and then to its grave. Much of all this happening at a pretty wide scale and I realised this during my short break last week as I interacted with various people from small scale entrepreneurs to shopkeepers on sidewalks .
 Of course, there are people who keep wondering when the investment cycle will kick off. I would say that it is a long way off. Biggies will wait for elections. Nobody likes dealing four-, ten-, twenty-headed authorities indulging in multiple speak about rules and giving them a hard time. For others, they will try to first get a  fix on what to do with their existing investments and capacities. That would go on for some time. As for me, I am really not expecting industrial scene to change any time soon.       

Another Crutch for Your Provident Fund

Well, this is a reaction to one of those unconfirmed press reports. It seems that Employees' Provident Fund Organisation (EPFO) is mulling investments in private sector bonds.  On the face of it, this sounds like a trivial detail. Actually, it isn't. This is one more effort to boost returns that is declared every year. Thanks to terrible control structure of the EPFO, the trustees nominated by the Labour Ministry propose a high rate every year and Finance Ministry, the other controlling Ministry, which finally has to endorse the rate, drags its feet or the final returns, either, or, and most of the times, both. It is a dreadful annual ritual. Given the state of the bond markets, believe it or not, but the large provident fund (PF) monies don't have adequate quality bonds in which they can be invested in. Of course, there are investment norms for PF monies. The sad part about EPF is that despite being a long term savings option, it has never given more than 2.0-2.5 per cent annual returns adjusted for inflation in best of times. And in these times of high inflation, you can banish the thought of a positive real rate of return. Imagine all this happening to funds where 12 per cent of one's basic heads before even one says boo. Unless I am wrong, this 12 per cent is one of the highest in the world.

And then there are a whole list of other problems from transferring and withdrawing, with the latter still requiring speed money in many cases.The whole system is yet to have the transparency which the subscriber deserves and is unlikely to get since EPFO, by law, regulates itself. Try finding some other examples.Since people keep withdrawing money from PF on some pretext or the other and take little interest in what is happening to their hard earned money in the long-term, this mess keeps perpetuating itself. In one pension seminar, many years back, I almost fell off the chair when one presentation showed 4 per cent fund management cost. I hope the expert was wrong. Any private asset manager would be crucified for something like that. What could make things change? One, try to popularise NPS. Once people get used to its transparency, they will demand more accountability. Second, have one regulator for all retirement funds. If you can't do that just get it to some other regulator. What the current dispensation has produced is there for all to see.     

The Jobs Problem

Just how much difference can a few basis points of economic growth make in the life of the people of nation? Lots if you ask me. As India's growth rate has gone downhill from 8.5 per cent to sub-5 per cent, there are two very painful implications that straight away come to my mind. First, when an economy adjusts to lower growth rates, so does future and existing employment. There have been various reports doing the rounds of the number of jobs lost in the last 24 months. One such figure that has stayed in my mind is about 10 million lost jobs. When you consider the bloodbath that has happened in financial services especially in life insurance the figure suddenly becomes believable.  When you have so many people losing jobs, staying unemployed or somehow making ends meet, this obviously has implications for the consumption economy. It also starts detering others from buying things and having as much fun as before.

The other painful implication is more significant. Lower growth translates to lower government revenues which means lesser resources to pull terribly poor people out of poverty. Over a longer period of time this might mean losing out a whole generation to poverty. In India, this could be catastrophic given our numbers. All this exactly opposite to what happened in India and China in the very high growth years when millions got pulled out of poverty. With global economic growth targets being hardly expected to be anywhere near the high growth years of the noughties, government anti-poverty resources will become even more precious and will have to be accurately directed to the needy without leakage. Viewed in that context, the government's direct transfer scheme becomes even more important.

But why I am at this today. Well, I read an article by Edelweiss' Rashesh Shah in one of the leading papers in the morning. It talks about how the organised sector has not been able to generate the employment that is required for people coming off agriculture. That is actually not a new development. Most such people have been in the adding up the massive bulge in the urban informal sector for decades. That's not to mention the large non-agri sector in rural areas. In this background, encouragement to small businesses becomes so important. Given the magnitude of problems that this sector has faced and is facing at the moment, whatever that has been done is inadequate. Government regulations, controls and corruption are the usual villains. Ask any small business owner. Possibly economic reforms will really make a difference to people's lives when enabling changes happen in areas like these.