Mains Practice Questions

Introduction

The Reserve Bank of India's (RBI) introduction of a Central Bank Digital Currency (CBDC) in 2022, also known as the digital rupee, represents a significant evolution in India's monetary system.

• This initiative aligns with global trends towards digitalization of currencies and has the potential to reshape financial inclusion in the country.

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Impacts of CBDC on Financial Inclusion:

• Increased Access to Financial Services: The digital rupee can potentially reach unbanked and underbanked populations, especially in rural and remote areas.
  • As of 2021, approximately 22% of Indian adults remain unbanked (World Bank Global Findex Database).
  • The digital rupee could help bridge this gap by providing a simple, digital means of financial participation.
• Reduced Transaction Costs: Digital transactions typically incur lower costs compared to traditional banking services.
  • The digital rupee could significantly reduce this cost as it can reduce the cost of printing and transporting physical currency.
• Enhanced Government Benefit Distribution: Direct transfer of government benefits becomes more efficient and transparent.
  • The success of the Direct Benefit Transfer (DBT) scheme, which has transferred over ₹24.8 lakh crore to beneficiaries since 2013, could be further amplified with the digital rupee.
• Enhanced Tax Compliance and Reduced Black Money and Counterfeiting: Increased traceability allows for better monitoring of financial transactions.
  • For instance, it will be easier to track from where did the businessman accumulate the money, did he pay an appropriate amount of tax or not.
  • It will also reduce the scope for counterfeiting.

Potential Challenges and Limitations

• Digital Divide: Limited access to internet connectivity in rural areas may hinder adoption. Over 56% of users in India face connection issues, indicating a significant portion of the population may face barriers to access.
• Cybersecurity Concerns: CBDCs would be able to accumulate sensitive payment and user data at an unprecedented scale.
  • In the wrong hands, this data could be used to spy on citizens' private transactions, obtain security-sensitive details about individuals and organizations, and even steal money.
• Erosion of Cash Flexibility: It may eliminate the distinction between cash and deposits.
  • Unlike physical cash, which doesn’t bear interest and can be used freely, digital currency in a bank account may restrict flexibility by earning interest but reducing immediate, interest-free liquidity.
  • This shift could have broader implications for how individuals manage their finances and access cash for routine expenditures.

Implementation Strategies for Enhanced Financial Inclusion:

• Infrastructure Development: The government can invest in expanding internet connectivity and digital infrastructure, particularly in rural areas, to bridge the digital divide.
• Financial Literacy Programs: The RBI and other financial institutions can collaborate to develop and implement financial literacy programs to educate individuals about the benefits and risks of digital currency.
• Regulatory Framework: A clear and comprehensive regulatory framework is necessary to govern the use of the digital rupee and protect consumers.
• Public-Private Partnerships: Partnerships between the government, private sector, and non-governmental organizations can help accelerate the adoption of the digital rupee.

Conclusion

The introduction of the digital rupee by the RBI presents a transformative opportunity for financial inclusion in India. The success of this initiative in promoting financial inclusion will largely depend on thoughtful implementation strategies, robust infrastructure development, and comprehensive digital literacy programs transforming India from cashbased to less-cash to cashless economy.