Bitcoin in India: Drivers and Barriers to Adoption

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Bitcoin’s growth in 2013 has accelerated tremendously, driven largely by economic concerns which bitcoin is uniquely positioned to solve. This has been evidenced so far this year by conditions in Cyprus, China and Argentina, and has highlighted bitcoin’s potential in less developed nations like Kenya as well.

All of the countries listed above are known for high inflation rates, strict capital controls, or a combination of both – a scenario that is beginning to unfold in India. This analysis will address India’s current economic climate and the factors that would affect the population’s propensity to adopt bitcoin on a large scale.

India’s Rupee Woes

The value of the Indian Rupee (INR) has fallen precipitously as a result of both international economic conditions and actions taken by the Reserve Bank of India (RBI). Understanding these factors and their impact on the INR will help assess the utility of bitcoin in India.

US Federal Reserve Tapering

Since May, the Rupee has fallen 24% against the dollar, reaching a record low of ₹68/$ on August 29. A primary culprit of this trend is the recent adjustment of language from the Federal Reserve to indicate that tapering of their $85 billion per month of asset purchases may be on the horizon. With a reduction in debt monetization from the Fed, the rate of increase in USD supply would fall – a positive sign for USD strength. Naturally, as the USD strengthens, other currencies like the INR become weaker in comparison.

Fed tapering has additional impact on emerging markets like India. Namely, as the Fed purchases less US Treasuries (UST), the supply of USTs available is likely to increase. The additional supply would in turn reduce the price of USTs and send yields on the bonds upwards. The effect of this is already being realized, with 10-year UST yields climbing 115 basis points since May to the highest rate in more than two years.

Rising UST yields can have a dramatic effect on emerging markets. As expected return (yield) increases on relatively low-risk USTs, money flows out of higher risk investments like those in emerging markets such as India and into USTs, which now appear much more attractive on a risk-weighted basis. The resulting exodus of capital from countries like India lowers the amount of USD available in the country relative to INR, impacting the currencies’ valuations.

Current Account Deficit

India’s current account deficit, or the difference in total value between exports and imports, has grown to a record 4.8% of GDP in 2013. This can have two profound effects on the value of the INR. First is the direct impact of sending more money off shore than is flowing back in. Since most international trade is denominated in USD, this means that more USD is leaving India from trade than is returning. As described above, if the availability of USD to INR decreases, the relative value of USD to INR increases.

A current account deficit also means that the country is a net debtor. With interest rates expected to continue rising in India as a result of US Fed actions and Indian equities falling dramatically over the past few months, the cost of repaying that deficit is poised to increase – a negative sign for the INR if investors see inflation as a potential tool to reduce debts.

ind cad

Oil and Gold Imports

Not to be underestimated in the recent INR narrative is the effect of commodities prices. The price of oil has risen dramatically over the past few years, from $76 per barrel in August 2010 to $109 per barrel in August 2013. An overwhelming majority of global oil trade is denominated in USD, so the price increase has only exacerbated India’s current account deficit and further reduced USD holdings within India. The problem has become so dramatic that India is considering maintaining oil imports from Iran – one of the few nations that accepts oil trade denominated in INR – despite likely financial sanctions from the U.S.

gold spotGold imports have had a similar effect on the current account balance, albeit for the opposite reason. As the world’s largest gold bullion consumer, Indian citizens didn’t hesitate to take advantage of the fall in gold prices so far this year, with imports to India reaching a record 162 tonnes in May. While there is certainly a wealth preservation aspect to the demand, the cultural importance of gold in India is a contributor to the demand boom as well, with gold serving as a historically important asset, often gifted at weddings and festivals.

Government Intervention

Realizing the effect the current account balance and falling INR are poised to have on the country’s economic outlook, the government has attempted to stem outflows with a series of tariffs and capital controls. The RBI instituted a series of capital controls this month that shocked investors, with Prime Minister Manmohan Singh following up on Friday by stating that capital controls would not be considered, as India would continue to pursue the open economy that has led its growth for the past two decades, though the final outcome of these measures is yet to be determined.

The Indian government has also taken a number of similar measures on gold imports this year, increasing import tariffs on the precious metal from 6% to 10%, as well requiring a license from the foreign trade office and a more recent move to encourage commercial banks to buy gold directly from consumers and send it to local refiners in an attempt to stem imports. The actions were undertaken in response to the massive demand that sent prices in India up to a $45/oz. premium over prices in London. Indian citizens are seeking alternative means of wealth storage and historic bargains on a culturally important commodity at the aggregate expense of the valuation of the INR.

Bitcoin’s Potential in India

With talk of inflation and capital controls familiar to the bitcoin community, one might think Indian citizens would be jumping at the opportunity to adopt the digital currency, yet the hurdles to wide-scale bitcoin proliferation in India may be significant for the foreseeable future. While demand for gold has grown in India, the multiple applications it offers culturally and industrially in addition to acting as an alternative store of wealth may mean that such demand does not translate to bitcoin. The country also faces a number of potential technological and regulatory concerns before bitcoin can achieve broad acceptance.

Capital Controls

With the RBI placing restrictions on the amount of capital both individuals and corporations can invest overseas, as well as the amount of gold that can be imported, Indians will continue to seek alternative means of wealth transfer and storage. Bitcoin may serve as an opportunity to send investment offshore without having to clear through an intermediary bank, or an alternative store of money if gold becomes inaccessible. This scenario has already unfolded in Argentina under more drastic applications from the same family of regulations; it’s not unreasonable to believe that if similarly pushed that Indians would seek similar measures.

Technological Penetration

As we’ve shown in the past, data indicates a correlation between bitcoin adoption and internet penetration in a given country. India, with just 12.6% of its citizens having internet access, has the sixth lowest internet penetration of the 100 largest countries. Despite that fact, the size of the total Indian population – more than 1.2 billion – makes India the third largest internet-using population in the world, with 150 million users, behind only China and the US.

downloads per capita

Even without broad proliferation, there is potential for a significant bitcoin market in India simply as a result of their immense total size, though it does not appear to have manifested to date. India holds just 0.7% of global connected nodes and 0.8% of the total bitcoin client downloads. A number of Indian bitcoin exchanges have risen and fallen over the last year, though none appear to have gained solid footing. However, it is possible to buy and sell bitcoin through a number of websites including buysellbitco.in and there does appear to be a healthy LocalBitcoins market.

Not to be overlooked is India’s mobile phone penetration of 71%, or approximately 900 million total users. In fact, India’s mobile users overtook those connected to the internet via a computer in 2004 as a result of the infrastructure and personal investment cost associated with mobile use being far lower. While only 44 million Indians are smartphone subscribers, which would give them access to standard mobile bitcoin wallets, companies like Coinapult offer bitcoin transactions via standard SMS. Yet, despite broad mobile penetration, interest remains moderated, with applications like bitcoin wallet losing traction since the April bitcoin bubble.

While it hasn’t proven to be broadly adopted yet, a vital precursor in the world of mobile payments is already growing. M-PESA, the mobile payment system that has changed the lives of millions in Kenya recently rolled out in India. In this case it is not the first such system in the country, with Airtel Money launching earlier this year. If mobile payment systems like these gain traction in India as they have in Africa, acceptance of digital currency would prove to be a less significant hurdle.

World’s Largest Remittance Market

Bitcoin’s ability to be sent between any two people with internet connections instantly and for almost no cost makes it a potentially powerful tool for the global remittance market. Remittances, or the transfer of funds from an emigrated worker back to his or her home country, play a vital role in developing economies. In fact, India had the highest remittance volume in the world in 2011 with $58 billion, or 3.1% of GDP, according to the World Bank.

remittance

With 41% of India’s population remaining unbanked, wire transfers are often not an option. Accordingly, that leaves only money transfer agents like Western Union, which charges $25 for a $2,500 transfer from America to India. End users of remittance services wouldn’t even have to know bitcoin was involved in their transfers, so long as there was ample trading liquidity for transfer institutions involved in a remittance to facilitate a swap to back fiat. Forward-thinking companies like Buttercoin have recently stepped in to apply the potential of bitcoin to these markets, though adoption rates of bitcoin-based remittance won’t be known until well after their launch.

Regulatory Uncertainty

A remaining wildcard in India’s bitcoin story is the future accommodation by the country’s regulators. The Reserve Bank of India has stated that it does not immediately intend to regulate bitcoin, but their historic actions indicate that may change soon enough. The RBI already took significant measures against foreign exchange and gold imports this year in an attempt to slow the Rupee’s slide; if bitcoin is seen as a threat to the stability of the national currency, it would seem probable for similar action to be undertaken.

As has been proven historically, greater hurdles are only a sign that bitcoin is needed. Like any other county, as forward-thinking entrepreneurs and bold investors continue to innovate, bitcoin will be poised to solve problems created by the legacy monetary system.

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About the author  ⁄ Jonathan Stacke

5 Comments

  • Reply
    Indibit
    September 3, 2013

    Come to the India Bitcoin conference! http://indiabitcoin.com/india-bitcoin-conference-2013-bangalore-november-16th/

  • Reply
    September 3, 2013

    This is the most detailed post I have seen on Bitcoin’s likely impact in India. Jonathan, I run a news website for startups withstartups.com and wanted to reproduce this article over there with attribution. I could not find your email address, could you please confirm. Thanks.

  • Reply
    Michael
    September 5, 2013

    As long as people see the large short term price swings of the value of bitcoin, it will always struggle to attract long term buyers. Very unfortunately

  • Reply
    Sam
    September 7, 2013

    Simply superb article! Keep up the good work.

  • Reply
    September 22, 2013

    Obviously, India is trying to force the citizens of their country to hold the Indian currency so the can print versus holdings as a form of mega banker theft. Bitcoin certainly offers a promising alternative. However, the more corporate banksters Bitcoin pisses off the more problems it will have in being accepted.

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