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Business News/ Opinion / Views/  Popularize the e-rupee even at the cost of UPI

Popularize the e-rupee even at the cost of UPI

The success of UPI after demonetization has been impressive but bank transfers aren’t costless and India has a prudential reason to promote RBI’s digital currency instead as a balancer

Photo: iStock

Paperless payments have been a big national goal ever since 8 November 2016, when India rendered 500 and 1,000 currency notes useless in a stunning decision that was upheld as valid by the Supreme Court on Monday. The ruling rejected petitions arguing that demonetization was done illegally. There was dissent, with gaps in law adherence seen by one judge in the record of talks that took place between the Reserve Bank of India (RBI) and the government, but a 4:1 bench majority held the process as satisfactory. The overnight note-ban was also found to satisfy a general test of proportionality. For all the hardship caused by weeks of cash starvation, that exercise of authority was not judged too drastic for its aims. The extent to which unaccounted-for money was flushed out, terror funding frozen and commerce formalized cannot reliably be estimated, but small businesses were clearly hit hard and India’s economy slowed down soon after. Today, our cash intensity remains roughly on the same incline as it was earlier. But online payments have soared. This means a fine policy judgement call will need to be made soon.

The past half decade’s big trend in our use of money has been the exponential rise of a platform that’s part of our ‘digital stack’ of public goods, a veritable source of pride in its own right. Designed for instant transfers between bank accounts done via mobile phones, the Unified Payments Interface (UPI) has been a spectacular success since its 2016 launch. According to National Payments Corporation of India (NPCI), its operator, UPI processed more than 74 billion transactions in 2022, up 90% over 2021, worth almost 126 trillion, a 76% leap. As these rapid gains are often cited in favour of the 2016 shock, the Centre may be inclined to approve of an NPCI target of a billion daily UPI transfers within the next half decade. With 381 banks in the loop, net-linked handsets everywhere and UPI adoption now so wide, it may even be doable without ticket sizes getting too tiny. But should it be done?

The case for UPI as India’s payment bedrock is weakened by the fact that while it levies no user fee, it isn’t a costless service. Last year, the finance ministry justified financial support for UPI on the ground that it’s a “digital public good with immense convenience for the public and productivity gains for the economy." If public funds are increasingly needed to back UPI as it expands, we must put it to a cost-benefit review as we go along; it is already logging huge sums and the total for 2023 may be much more. Yet, it’s not just a cost consideration that should make us promote RBI’s retail e-rupee instead for routine payments. The latter’s mass usage would involve circulation of money that’s a direct liability of the central bank (an IOU issued by it, i.e., like cash), which would better serve the cause of economic stability than an over-reliance on banks that square off transfers among themselves. This is because what RBI owes its currency bearers is entirely free of risk, while the same cannot be said of banks even in a closely regulated sector where deposits are mostly safe, bank runs rare and contagion fears low. For superior systemic safety, the e-rupee should get a significant share of online payment swipes. Even if its holdings earn no interest, it could catch on if the security of its value, ease of liquidity and erasure of data trails (below a limit) are duly advertised. For an e-rupee to aid macro level prudence, it will have to eat into UPI.

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