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Topic : Digitalisation and Its Impacts

GS-3 Mains  : Economy

Context

The Reserve Bank of India’s (RBI) Report on Currency and Finance (RCF) for 2023-24 highlights that digitalisation-induced changes in consumer and financial intermediary behaviour can significantly impact monetary policy.

India’s Digital Payments Market

India boasts one of the world’s fastest-growing digital payments markets. By 2023, the market size reached approximately $3 trillion, growing at a compound annual growth rate (CAGR) of around 27% since 2018.

• Growth Enablers:
  • Government and Private Sector Initiatives: Numerous initiatives and reforms have spurred the adoption of digital payments.
  • Unified Payments Interface (UPI): Developed by the National Payments Corporation of India (NPCI), UPI has revolutionized digital payments, experiencing a tenfold increase in volume from 12.5 billion transactions in 2019-20 to 131 billion transactions in 2023-24, accounting for 80% of all digital payment volumes.
  • Other Modes: Mobile wallets, net banking, and card payments also significantly contribute to this growth.
• Significance:
  • Boost to External Trade: Digitalisation can enhance India’s trade in goods and services.
  • Reduction in Remittance Costs: Digital international payment systems can lower the cost of receiving remittances, leading to higher remittances and increased income or savings for recipients.

Project Nexus

• RBI’s Involvement: The RBI has joined Project Nexus, a multilateral initiative aimed at enabling instant cross-border retail payments by interlinking domestic Fast Payment Systems (FPS).
• Countries Involved: India’s UPI will be interconnected with the FPSs of Malaysia, the Philippines, Singapore, and Thailand through Nexus.

Concerns

• Impulsive Spending and Herd Behaviour: Digital platforms facilitate rapid dissemination of financial trends and choices, which can lead to impulsive spending and herd behaviour. For example, mass buying or selling of stocks during a market frenzy or depositors withdrawing money en masse from banks.
• Data Security: The average cost of data breaches in India rose to $2.18 million in 2023, a 28% increase since 2020. Phishing attacks (22%) and stolen or compromised credentials (16%) are the most common.

Impact on Economy

• Inflation and Output Dynamics: Digitalisation can affect inflation and output dynamics and alter monetary policy transmission in various ways. The overall impact is subject to change given the rapid pace of digital developments.

Way Ahead

• Proactive Policy Measures: The RBI is actively implementing policies to leverage the benefits of digitalisation while mitigating emerging risks in the financial sector.
• Cross-Border Digital Trade Policies: These policies are crucial for harnessing new opportunities, building trust, and facilitating coordination on regulatory aspects such as data security and cybersecurity.
• Internationalisation of the Rupee: This is progressing with a comprehensive and integrated policy approach.