The coming financial year will be rather interesting as it might witness the fructification of several budget proposals. The most obvious one that comes to mind is the disinvestment of LIC which was supposed to have concluded in March but now looks likely to be completed in the next financial year. But the question is when will this be done?
The other two major budget announcements pertain to the issuance of sovereign green bonds and a central bank digital currency. These two launches will be a joint effort between the government and the RBI. 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.
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. This money is raised by the government to finance the deficit which involves excess expenditure on both the capital and revenue accounts. But considering that money is fungible, it is hard to figure out where the borrowed money goes. In the case of sovereign green bonds, though, an exception has to be made. 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. The groundwork for this should be done in advance.
The pricing of these bonds will be tricky. 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. Or will it be the case of these bonds being priced at lower rates to aid ESG implementation? 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.
The central bank digital currency, also known as CBDC, is also an interesting concept. It seems to be an outcome of the proliferation of cryptocurrencies. This has pushed several central banks into developing their version of digital currencies. This reasoning could be misleading because cryptos are an investment option, unlike a CBDC which is a substitute for currency. For launching such a currency, the RBI has to address certain fundamental questions.
First, is a CBDC going to replace currency at some point in the future? Is this just another option for the public or will physical currency disappear? One must remember that there are several sections in India that are not conversant with technology.
Second, 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? This is a pertinent question because there seems to be a large volume of cash in the system post demonetisation. Will people need to choose between a mobile wallet and a CBDC wallet?
Third, any issuance of CBDC on a voluntary basis also raises a question on the security of the owner’s information. Aadhaar is supposed to ensure that an individual’s information is confidential, yet there is scepticism. That’s why CBDC has to be clear on the issue of confidentiality as it is bound to be a matter of concern. If it is not confidential, even a CBDC, given as a gift to a couple on their marriage will be tracked by the income tax department.
Fourth, what will be the future of the banking system as CBDC catches on? If people have to be incentivised to move voluntarily to the CBDC, the cash exchanged must earn an 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.
Fifth is the issue of security as any financial system that runs on technology can be hacked. It has to be foolproof and power failure resistant. Such systems have to be created and tested before a CBDC is brought in. 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.
If they succeed at the central level, green bonds can be replicated by states. 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.
This column first appeared in the print edition on March 24, 2022 under the title ‘Changing face of money’. The writer is Chief Economist, Bank of Baroda and author of Hits & Misses: The Indian Banking Story. Views are personal