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The Impact of Digitalisation
Context:
The Report on Currency and Finance (RCF) for 2023-24, issued by the Reserve Bank of India (RBI), indicated that changes in consumer and financial intermediary behaviour driven by digitalisation could impact monetary policy.
Do You Know:
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Digitalisation:
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- It refers to the continuous incorporation of digital technologies and digitised information throughout the economy and society.
Benefits of Digitalisation:
- It can enhance India’s external trade by leveraging comparative advantages in modern services and reducing the cost of receiving remittances.
- Initiatives like Project Nexus aim to facilitate instant cross-border payments by linking domestic Fast Payments Systems (FPS) with the other countries.
- Effective cross-border digital trade policies are crucial for harnessing opportunities, ensuring data security, and coordinating regulatory aspects.
- The report notes an increase in digital payment transactions through the Unified Payments Interface (UPI), which has surged from 12.5 billion transactions in 2019-20 to 131 billion in 2023-24.
- This growth reflects the expanding adoption of digital financial services in India, contributing to the country’s economic landscape.
- As of June 2024, UPI records nearly 14 billion transactions a month and has 424 million unique users.
- The Economic Survey 2022-23 mentions that digitalisation boosts economic growth by enhancing financial inclusion, formalisation, efficiency, and opportunities.
- It also notes that digitalisation reforms will be the second most significant driver of India’s medium-term economic growth.
- This is due to its strong connections and forward linkages with the non-digital sectors.
Digitisation vs Digitalisation:Digitisation:
Digitalisation:
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Impact of Digitalisation:
- On Consumer Behavior: Digitalisation can lead to impulsive spending as consumers are more influenced by real-time trends and social networks.
- Herd behaviour may cause mass financial activities such as buying or selling stocks, potentially leading to market volatility or bank runs.
- On Monetary Policy: Digitalisation affects inflation, output dynamics, and monetary policy transmission.
- Shifts from regulated banks to less-regulated non-bank entities can impact credit supply and bank deposits, altering the efficacy of monetary policy.
- RBI suggests that Central banks must integrate digitalisation aspects into their models to maintain effective monetary policy and achieve stability goals.
- Financial System and Stability: Digitalisation creates a more interconnected financial system, which can affect financial stability and the transmission of monetary policy.
- There is a need for proactive regulatory measures to address emerging risks while harnessing the benefits of digitalisation.
- Cybersecurity Risks: Increased digital transactions expose consumers to data breaches.
- The report mentions that the average cost of such breaches in India was $2.18 million in 2023, a 28% increase from 2020.
- The most prevalent forms of cyberattacks include phishing (22%) and compromised credentials (16%).
- Globally, the cost of cybercrime is projected to rise to $13.82 trillion by 2028, up from $8.15 trillion in 2023.
- Impact on Labour Markets: Digital revolution is transforming labour markets by altering workforce composition, job quality, and skill requirements.
- The report highlights the challenges of upskilling and reskilling the workforce to adapt to the demands of digital technologies.
- On Sustainable Development Goals: Digitalisation offers the potential to drive development and realign efforts towards achieving the SDGs.
- Nevertheless, if not implemented effectively, it can also create, reinforce, and worsen existing inequalities and challenges.
Conclusion:
- Digitalisation in finance is revolutionising banking by improving access to services, lowering costs, and enhancing direct benefit transfers through efficient targeting.
- However, it also brings challenges like cybersecurity, data privacy, and systemic risks.
- To address data misuse, RBI enforced data localisation and mandated explicit user consent for digital lending apps.
- The report stresses the need for robust, regularly tested algorithms in model-based lending by banks and Non-Banking Financial Companies (NBFCs) to ensure financial system integrity and stability.
