From UPSC perspective, the following things are important :
Prelims level : Central Bank Digital Currency
Mains level : Paper 3- CBDC and Sovereign Green Bond
The other two major budget announcements pertain to the issuance of sovereign green bonds and a central bank digital currency. While geopolitical turbulence might make the current moment inopportune for experimentation, the government seems firm on both the proposals and they will most probably be rolled out.
Sovereign green bond (SGB): how it is different from a traditional bond
- The sovereign green bond is a novel idea.
- It will be a part of the government’s borrowing programme.
- The gross borrowing programme of the government is pegged at Rs 14.95 lakh crore.
- The SGB (sovereign green bond) raised will be part of the aggregate borrowing programme and has to be used for projects which are ESG (environment, social and governance) compliant.
- Hence, if the bond is being used to finance a power project or road, or in case it is used to finance revenue expenditure, it has to be ESG compliant.
- If they succeed at the central level, green bonds can be replicated by states.
Challenges for SGB
- Pricing challenge: As these bonds are different from G-secs (government securities), they may have to provide a better return as all ESG compliant companies have to make special investments that will push up costs.
- Low-interest rate: Further, given the low-interest rates prevailing today — real returns on deposits are negative — the SGBs can be issued as tax-free bonds, open to the public.
- This will evince a lot of interest given that these are government-issued bonds.
- The RBI and the government have been trying to get retail investors to participate in the government’s borrowing programme, and this move will expedite the process.
Central bank digital currency (CBDC) and challenges
- For launching such a currency, the RBI has to address certain fundamental questions.
- 1] Will it replace currency: Is a CBDC going to replace currency at some point in the future?
- One must remember that there are several sections in India that are not conversant with technology.
- 2] How will it be different from digital payments: If it is going to coexist with currency, how different will it be for the public from the digital payments that are being made today?
- Will people need to choose between a mobile wallet and a CBDC wallet?
- 3] Security of owner’s information: any issuance of CBDC on a voluntary basis also raises a question on the security of the owner’s information.
- CBDC has to be clear on the issue of confidentiality as it is bound to be a matter of concern.
- 4] The future of the banking system: If people have to be incentivised to move voluntarily to the CBDC, the cash exchanged must earn interest or else all money will go to bank accounts where a minimal interest rate can be earned.
- Will we require savings bank accounts with commercial banks in case all cash goes to the RBI?
- Will we then require ATMs for cash withdrawal? Will bank tellers become redundant? Will we need logistics companies that handle cash?
- These finer issues need to be addressed by the RBI as the widespread use of CBDC will progressively lead to lesser need for banks.
- 5] Issue of security: Any financial system that runs on technology can be hacked.
- It has to be foolproof and power failure resistant.
- There is a real danger of cyber fraud increasing as the majority of the population is not tech-savvy.
- Similarly, there is always downtime for bank servers when banking transactions cannot be carried on.
- This cannot be allowed to be the case with CBDC as it has to be available on a 24 x 7 basis.
Consider the question “What are green bonds? How the green bonds can act as a tool to achieve the targets of sustainable development as a means of finance?”
The arguments for CBDC are compelling on the grounds of keeping up with the central banks of other countries, and the possibilities of taking advantage of new technologies like blockchain. But before embarking on these measures, it might be useful to keep in mind the issues flagged above.