A nation’s central bank issues and backs the digital fiat currency known as Central Bank Digital Currency (CBDC).
Similar to traditional cash but in digital form, it is used as payment.
The purpose of CBDC is to offer an efficient, affordable, and secure alternative to real money in the form of digital fiat currency. India is one of the many nations in the globe where the idea of CBDC is gaining popularity.
This article will examine what CBDC is in India, its possible advantages and drawbacks, and how it may affect the economy of the nation.
CBDC is a trustworthy and safe type of digital currency since it is issued and supported by a government or central bank, in contrast to cryptocurrencies which are decentralized and not backed by any central authority.
In comparison to real money, it is intended to be more effective, affordable, and secure. Peer-to-peer transactions, in-person payments, and internet payments may all be made using it.
CBDCs come in two varieties: retail and wholesale. Whereas wholesale CBDC is intended for use by financial institutions, retail CBDC is intended for use by the general population.
CBDC in India
For long years now, India has been considering the prospect of establishing its own CBDC. In reality, since 2018, the Reserve Bank of India (RBI) has been studying it. The RBI did not, however, formally declare its plan to start until January 2021.
The RBI’s move to establish a CBDC comes as Indians are becoming more and more accustomed to using digital payments. It may aid in further streamlining the Indian payments ecosystem given the government’s desire for a paperless society and the rise of mobile payments.
Possibilities for CBDC in India-
It have a number of potential advantages for India. Let’s examine them more closely.
- Producing and distributing physical currency at a lower cost
Reduced costs for generating and distributing physical money is one of the key advantages of CBDC for India. The RBI may cut back on the demand for physical cash and the expenses related to making and shipping banknotes by switching to a digital currency. For the government and the RBI, this may result in cost savings that they may then pass along to the general population.
The cost of making banknotes has climbed over 50% over the previous five years, according to a study by the RBI. The price of printing one rupee note was roughly 94 paise in 2015–16, but it grew to Rs. 1.49 in 2020–21. A Rs. 2,000 note costs around Rs. 4.18 to produce, but an Rs. 10 note costs approximately Rs. 9.14. The RBI may drastically lower these expenses with the introduction of CBDC, resulting in cost savings for the public and for the government.
- Reduce Transaction Costs
The ability of CBDC to lower transaction costs is another advantage. Presently, there are a number of fees and charges associated with digital payments in India, including transaction fees and merchant fees. Transactions may be handled quickly and inexpensively with it, which helps promote financial inclusion and provide access to digital payments for all.
In 2020, the World Bank estimated that the cost of remittances to India will be around 5.5% of the transaction value. The cost is much higher than the 6.5% cost average for the entire world. A CBDC can lower transaction costs, enabling consumers to send and receive money more easily and affordably.
- Enhanced Security and Efficiency
Another advantage of CBDC is that it can contribute to enhancing the effectiveness and security of India’s payments ecosystem. Transactions may be handled instantaneously when using a digital currency, which helps shorten processing periods and speed up payments.
Moreover, CBDC can aid in lowering the danger of fraud and counterfeiting. The possibility of counterfeit notes is always there when using actual money, and they might be challenging to spot. With a CBDC, transactions may be instantaneously confirmed and certified, reducing the risk of fraud and counterfeiting.
- Support for the Goals of Monetary Policy
The monetary policy goals of the RBI can also be supported through CBDC. The RBI can more readily change interest rates and maintain better control over the money supply with it. This may assist both stability and economic progress.
The RBI can utilize CBDC to pursue targeted policies, such as giving financial support to particular industries or population groups. For instance, the RBI can use it to give small firms that have been harmed by the COVID-19 outbreak tailored financial aid.
CBDC’s difficulties in India
While CBDC provides numerous potential advantages for India, there are a number of difficulties that must be overcome. Let’s examine them more closely.
- Providing Accessibility and Security
Keeping the money accessible and secure is one of CBDC’s biggest difficulties. There is always a chance of cyberattacks and hacking with digital money. The RBI must make sure that the CBDC is built with strong security mechanisms to guard against hacking and illegal access.
The RBI will also need to make sure that everyone, including those in rural locations and those without an internet connection, can access the CBDC. To facilitate CBDC transactions across the nation, a solid infrastructure will need to be built.
- Minimising Monetary Risks
A further difficulty for CBDC is mitigating financial risks. It carries the potential for people to begin hoarding digital currency, which might result in price increases and economic instability. In order to encourage consumers to utilize the CBDC for transactions rather than keeping it as an investment, the RBI will need to make sure that it is constructed in such a way.
- Accessibility to Current Payment Systems
Assuring interoperability with current infrastructure and payment methods is another hurdle for CBDC. With several digital payment systems in operation, India has a diversified and complicated payment environment. To guarantee a seamless transition to the new currency, the RBI must make sure the CBDC is interoperable with these systems.
- Privacy Issues
The debut of CBDC has raised worries about privacy, to sum up. There is a chance that personal information might be abused or compromised while using digital currency. To secure user data, the RBI must make sure that the CBDC is built with strong privacy protections.
Economic effects of CBDC on India
The introduction of CBDC in India may have a big effect on the economy of that nation. Below are a few possible effects of it.
- Financial Inclusion Increasing
CBDC has the potential to broaden financial inclusion in India by facilitating universal access to digital payments. Those who live in rural regions or do not have access to regular financial services may still take part in the digital economy thanks to CBDC. This can lessen reliance on cash and encourage more individuals to participate in the official financial system.
- Transaction Costs Are Lower
As was already noted, CBDC may contribute to transaction cost reduction, making it more affordable and convenient for customers to send and receive money. This can boost small firms, which are frequently negatively impacted by high transaction costs, and promote economic growth.
- Efficiency and transparency improvements
The Indian payments ecosystem’s efficiency and transparency may be increased with the aid of CBDC. It can contribute to a reduction in the time and expenses involved in payment processing through immediate transactions and real-time verification. Both companies and customers may benefit from an increase in the speed and accuracy of payments as a result of this.
- Additional Monetary Policy
Moreover, CBDC can support improved Indian monetary policy efficacy. The RBI may alter interest rates more readily and conduct tailored policies to promote certain sectors or groups of people if it has better control over the money supply and more precise data on transactional activity. Long-term economic development and stability may be supported by this.
- Higher Tax Compliance Rate
Moreover, CBDC can support greater tax compliance in India. Real-time verification and digital transactions may make it simpler for the government to keep tabs on and regulate financial activities. This may contribute to a decrease in tax evasion and an increase in tax receipts, which may then be used towards infrastructure and social welfare initiatives.
- Possibility of Innovation
Also, CBDC may create fresh possibilities for advancement and innovation in the financial services sector. Businesses and entrepreneurs may create new products and services using a new digital currency that capitalizes on it’s advantages. Long-term economic growth may be supported by this, as well as the creation of new employment.
By enhancing the accessibility, affordability, and security of digital payments, CBDC has the potential to completely alter the Indian payments environment. While it has a lot of potential advantages, there are also a lot of obstacles that need to be overcome, such as assuring security and accessibility, avoiding financial risks, and making sure it can work with current payment systems.
Overall, the introduction of CBDC in India has the potential to significantly affect the economy of the nation by promoting financial inclusion, lowering transaction costs, enhancing efficiency and transparency, improving monetary policy, raising tax compliance, and creating new opportunities for innovation and development.
One thing is certain: CBDC has the ability to alter how we think about money and payments in India. It remains to be seen how the RBI will negotiate the obstacles and prospects of CBDC.