India should take a cautious and gradual approach towards launching a central bank digital currency (CBDC) as developing it could have some hazards, including those to institutions, end-users of retail CBDCs, and the reputation of the central bank, says a National Council of Applied Economic Research (NCAER) working paper.

India’s own experience with demonetisation is a reminder of the importance of preparing infrastructure and implementation capacity in advance of a comprehensive rollout, Poonam Gupta, director general of NCAER and part-time member of the Economic Advisory Council to the Prime Minister, said in the paper co-authored by her.

Finance Minister Nirmala Sitharaman in her Budget speech had stated that “introduction of Central Bank Digital Currency” (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting in 2022-23.”

“We argue that many of these arguments for CBDCs have been advanced uncritically. Their proponents fail to acknowledge that some of these goals can be advanced at lower cost and at less risk through alternative means,” the report stated.

The paper said while a CBDC would have more penetration compared to credit or debit cards, the reach of Unified Payments Interface is already widespread. “In its history to date, UPI has hosted some 70 billion transactions, some as small as one rupee, making it the world’s largest real-time payment system by transactions,” it said.

The paper said that while greater financial inclusion is also one of the reasons behind pushing CBDC, it can also be achieved through simply opening more bank branches in rural areas and providing services through non-bank partners and agents.

“Rationale sometimes heard for CBDC issuance is to enable the central bank and the government to retain control of the payments system in the face of stable-coins and other private payment rails.

“If the concern is the concentration of payments in a single or small set of private hands, then the obvious solution is to strengthen regulation of those private providers,” it said.