TAG: GS 3: ECONOMY
THE CONTEXT: India is spearheading the global digital revolution, leveraging its advanced digital public infrastructure, a dynamic financial technology (FinTech) ecosystem, and a supportive policy environment.
EXPLANATION:
- This assessment comes from the Reserve Bank of India’s (RBI) Report on Currency and Finance (RCF) for the year 2023-24, released recently.
Highlights of the report:
- The report, themed “India’s Digital Revolution,” highlights how digital technologies are unlocking significant opportunities in various sectors, including financial inclusion, fiscal transfers, and cross-border trade and remittances.
- The regulatory framework’s positive role has increased consumer confidence in digital financial products and boosted the operational and technical efficiencies of financial institutions.
- India has made remarkable strides in building robust digital public infrastructure.
- Governor pointed out that India leads globally in biometric-based identification with Aadhaar and real-time payments volume.
- India ranks second in telecom subscribers, and holds the third position in terms of the start-up ecosystem.
- Unified Payments Interface (UPI)
- The flagship Unified Payments Interface (UPI) has revolutionized retail payments, making transactions faster and more convenient for end-users.
- The digital lending ecosystem is also becoming more vibrant with initiatives like the Open Credit Enablement Network, the Open Network for Digital Commerce, and the Public Tech Platform for Frictionless Credit.
- Advancements in Digital Finance
- Digitalization in finance is paving the way for next-generation banking.
- It improves access to financial services at affordable costs and enhances the impact of direct benefit transfers by effectively targeting beneficiaries cost-efficiently.
- Online payments are facilitating retail loans, and embedded finance is boosting e-commerce.
- These innovations are making financial markets more efficient and integrated.
Impact on Services Exports and Remittances
- On the external front, digitalization is driving growth in India’s services exports and lowering remittance costs.
- India’s digital journey is setting a benchmark for peer economies, showcasing how robust digital infrastructure can enhance economic performance.
Challenges Posed by Digital Technologies
- Despite the numerous benefits, digital technologies also present significant challenges.
- These include cybersecurity risks, data privacy concerns, vendor and third-party risks, and customer protection issues.
- The complexity of financial products and business models introduced by emerging technologies can pose risks that users may not fully understand.
- Additionally, the proliferation of fraudulent apps and mis-selling through dark patterns are concerning issues.
Human Resource Challenges
- The report emphasizes the need for strategic investments in upskilling and reskilling human resources within the financial sector.
- Digitalization may introduce human resource challenges that necessitate continuous learning and adaptation to keep pace with evolving technologies.
Policy Challenges
- In this rapidly evolving landscape, balancing financial stability, customer protection, and competition remains a key policy challenge.
- The increased inter-connectedness brought about by digitalization can lead to systemic risks.
- The RBI underscores the importance of addressing these challenges to ensure a stable and secure digital financial environment.
Reserve Bank of India
- The Reserve Bank of India (RBI) was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
- The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
- Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
- RBI holds a prominent position in India’s economic landscape, entrusted with pivotal responsibilities such as maintaining monetary stability, managing currency, regulating banks, and influencing interest rates.
- The RBI’s inception marked a crucial milestone in India’s economic development.
- With the enactment of legislation in March 1934, the RBI commenced its operations on January 1, 1935.
- The appointment of Sir Osborne Arkell Smith as the first Governor, followed by Indian officials like Sir C D Deshmukh, signified a blend of international expertise and indigenous leadership.
Composition of the RBI
- The overall direction of the RBI lies with the 21-member central board of directors, composed of:
- One Governor;
- Four Deputy Governors;
- Two Finance Ministry Representatives (usually the Economic Affairs Secretary and the Financial Services Secretary);
- Ten government-nominated Directors; and
- Four Directors who represent local boards for Mumbai, Kolkata, Chennai, and Delhi.
- Each of these local boards consists of five members who represent regional interests and the interests of co-operative and indigenous banks.
Unified Payments Interface (UPI)
- The UPI is a digital and real-time payment system developed by the National Payments Corporation of India (NPCI) and regulated by the Reserve Bank of India (RBI).
- It was launched on April 11, 2016.
- It is designed to enable peer-to-peer inter-bank transfers through a single two-click factor authentication process.