India’s UPI is an exemplar for the world: Eswar Prasad

The main purpose of the meeting is to try to advance the discussion on financial globalization. There has been a lot of concern about whether financial integration really helps emerging markets and developing economies or simply creates too much risk for them. There was some discussion about how to improve the international rules of the game in which capital flows are managed, including whether developed countries bear any responsibility for managing the spillover effects of their policies through capital flows, and issues related to debt restructuring of overburdened low-income economies. Heavily.

In all of these, there is a bit of a rift between the developed economies on the one hand and the emerging market and developing economies on the other. The Indian presidency really wants to turn this conversation in a more positive direction, because emerging market countries need foreign capital. So the idea of ​​this meeting was to try and see if there is a way to structure these capital flows in a way that is much better for the recipient countries, that doesn’t create a lot of volatility or risk for them.

It’s a somewhat mixed picture. Sure, things are looking less bleak than they did a few months ago, or even a few weeks ago. But the signals have been quite mixed, coming from different economies.

In the US, there was concern that sharp interest rate increases by the Federal Reserve would inevitably lead to a recession. Now, the probability looks more even, and perhaps the US will escape a very soft recession, or perhaps even the ultimate goal of a soft landing, which means slower growth and lower inflation at the same time. But without stagnation.

The US inflation rate has been declining, but it is still showing a lot of stability. The job market has remained remarkably strong, which has fueled job growth. But consumer and investor confidence doesn’t seem to be very high right now, and that’s a concern in terms of long-term growth.

China is in a similar situation. The removal of the zero Covid policy created a wave of optimism but also created some turmoil in the short term. But in the early part of this year, it was felt that industrial activity and consumer demand were improving and that the economy could do well this year, potentially easily achieving or possibly exceeding the 5 percent growth target set by the government. hiring.

But in the past few weeks, many indicators of manufacturing activity have come in less strong than expected: employment growth appears to be very weak, and the unemployment rate, especially among young people, very high. And again, consumer confidence, as reflected in retail sales, for example, and also private sector investment was very weak. And now in China, the picture looks much better than it did six months ago, but it’s less good than it did two months ago.

Europe is technically in recession right now, because Germany and a couple of other core economies have been experiencing negative growth in the past two quarters. There are some parts of the Eurozone that are doing fairly well, but the Eurozone as a whole is not doing so well.

And then if you look at the emerging market economies, India seems to be doing quite well but many other emerging markets are under fairly significant pressure. So one feels that this year could be a little benign in terms of growth results, but the possibility of it being some type of breakout post-Covid year seems less likely now.

I think the world, including the geopolitical competitors of the United States, as well as allies, is really upset about the dominance of the dollar. But the fact is that the dollar is still dominant in practically all dimensions as financing and payment, and especially as a reserve currency.

But I think it’s worth emphasizing the distinction I just made, and the different roles of international currency. If you think about the Russian invasion of Ukraine and the ensuing sanctions, the main concern for Russia was the fact that in terms of international payments, it would be very restrictive if it didn’t have access to dollar-based financing. System. China and many other US competitors also see this problem. Now, it turns out that there are already technological developments underway that will reduce reliance on the dollar as a payment currency.

China has created its own payment system called the Cross-Border Interbank Payment System, or CIPS, that can communicate directly with other countries’ payment systems.

In addition, you have the development of financial markets in several emerging markets. Now, it is easier to trade directly between currency pairs such as the ruble and the renminbi, the renminbi and the rupee or the rupee and the Brazilian real without necessarily having to go through an intermediary currency like the dollar.

So these changes are underway. Now, are we going to see a fundamental shift in the dollar’s role as a currency of payment or perhaps even of issue of bills? On the sidelines maybe. We have heard of Saudi Arabia billing some of its oil exports in renminbi instead of dollars and accepting payments in renminbi. But the fact is that the RMB is not a convertible currency because there are still capital restrictions in China. So it’s hard to see this gaining an enormous amount of momentum.

Then as a reserve currency, there is another complication for the dollar’s potential competitors. A reserve currency is the currency that central banks hold on rainy days, because they want to protect their balance of payments when they need hard currencies to pay for imports or pay down their debts. And for this, you need a currency backed by deep financial markets, a country of significant economic size, and most importantly, an institutional framework that generates confidence among foreign investors.

So if you think of a country that can provide a currency, in significant amounts, with a reliable central bank and has an institutional framework that’s still reasonably good, it’s very hard to compete with the United States.

I feel that in the future, we’re going to see some erosion of the dollar’s prominence. As a payment currency, it will still be the most important currency, but it may lose some of its stake. As a reserve currency, its role seems much safer and I don’t see much of a shift away from the dollar. The dollar’s dominance will be reinforced by the fact that it has no serious competitor.

It is clear that the future of money is digital. If you think about many large, developed economies, they are shifting towards digital payment methods. Many emerging market economies and even lower income economies are shifting towards digital forms of payment as well.

There are some advanced economies such as the United States, Japan, and Switzerland, which, oddly enough, still use cash a lot for retail transactions. But the future of money is really digital. And I think central banks, realizing that, are issuing or piloting retail central bank digital currencies, to make sure that there is a public payment option available once the use of the physical currency that is money is gone.

But one of the paradoxical things that is happening in a lot of countries, China being an example of that, and I think India is going to become an example of that as well, is that even as we start moving towards CBDCs, the user case of CBDCs is becoming somewhat weaker.

In China, for example, Alipay and wechat pay are two of the largest payment providers, and they have blanketed the economy with very low-cost and easily accessible digital payments. So the question is, why is the digital renminbi needed. China is far ahead of most other countries in terms of its digital currency experiments, and a lot of RMB digital wallets for CBDCs have been opened. But the volume of transactions was very small, because people do not see the point of central bank currencies. As for Sweden, another early experiment with CBDCs was recently concluded by a Swedish Parliamentary Committee, that at the moment, they don’t really need CBDCs because the private payment infrastructure works so well.

In India, the way UPI works is a role model for the rest of the world, because it gives so many people easy access to it; It forces payment providers running on the platform to provide interoperability across different payment providers, which is one of the big selling points of CBDCs.

So, I think CBDCs are coming, but how widespread they will be remains open to question. Perhaps digital payment methods can control corruption, at least on the fringes, although it hasn’t actually changed the incentives that really fuel corruption. Having more economic activity in the formal economy is definitely an advantage for CBDCs. Of course, there are risks from CBDCs. One of the risks of digital wallets is that you could interfere with the banking system if people move their money away from bank deposits into a central bank’s digital currency wallet.

This concern in normal times may not be a problem. But if there is a panic about the banking system, you may have a huge shift in deposits from the commercial banks, which could lead to a banking crisis.

In the US, there has recently been a flight of deposits from Silicon Valley Bank and First Republic Bank. If CBDC wallets are readily available, even though part of the deposits are covered by deposit insurance, people might have moved their money into CBDC digital wallets, then you have exactly the event you’re trying to prevent, which is a banking problem.

So those design choices, both conceptual and technical, are going to need to be thought through very carefully to make sure that we can mitigate some of these risks in terms of privacy, non-mediation and so on, before we move forward.

But I see this as inevitable, because very soon, we will be out of cash altogether. For households, merchants, convenience stores, corner stores, large retailers and for governance, digital payments are more efficient and convenient.