Topic: Government Budgeting.
4. India’s progress in payment systems will provide a useful backbone to make a state-of-the art central bank digital currency (CBDC) available to its citizens and financial institution. But given its impact on macroeconomic policy making, it is necessary to test comprehensively so that they have minimal impact on monetary policy and the banking system. Discuss. (250 words)
Difficulty level: Easy
Reference: Live Mint , moneycontrol.com
Why the question:
In her Budget 2022 speech on Tuesday, Finance Minister Nirmala Sitharaman announced the Reserve Bank of India (RBI) will launch its own digital rupee in the new financial year. The Digital Rupee is a central bank digital currency (CBDC) that will be launched in 2022-23, the FM said.
Key Demand of the question:
To explain about CBDC, the technology behind it, its potential benefits and challenges.
Directive word:
Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.
Structure of the answer:
Introduction:
Start by explaining the concept central bank digital currency (CBDC)
Body:
In the first part, explain the technology behind CBDC – Blockchain giving rise to secure digital instruments. Also, mention from where CBDC will derive its value from. Mention the growing acceptance of CBDC in India.
Next, write about potential benefits that India can accrue from CBDC. financial inclusion, the cashless society, decrease the cost of printing, expanding the digital economy and empowering citizens etc.
Next, write about potential challenges with regards to CBDC. User adoption, security, complexity, domination by Chinese and Opportunity cost due to RBI’s reluctance etc.
Conclusion:
Conclude with way forward as to how India should step up to CBDC.
