1

Economics and Current Affairs

Weekly Mains Question WT ECO CA 04

1. Central Bank Digital Currency is a double-edged sword which has the potential to both advance
financial inclusion and threaten the position of commercial banks in the economy. Comment.
(150 Words, 10 Marks)

2. Priority Sector Lending in India faces several challenges. In this context, discuss its utility as a
policy instrument.
(150 Words, 10 Marks)

3. What are the challenges and benefits of the digital economy in India? What are some of the
government of India's efforts to promote the digital economy?
(150 Words, 10 Marks)

4. With technological advancement, can it be said that the Indian banking system has finally
succeeded in paving its road to the last home? Also, discuss the role of niche banks in achieving
Financial Inclusion in India.
(250 Words, 15 Marks)

5. Analyse the effects of the 1991 LPG reforms in India. What lessons can be learned from it to
help India weather the current economic crisis?
(250 Words, 15 Marks)
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1. Central Bank Digital Currency is a double-edged sword which has the potential to both advance
financial inclusion and threaten the position of commercial banks in the economy. Comment.
(150 Words, 10 Marks)

How to approach the question

Introduction:
 Briefly mention about Central Bank Digital Currency
Body:
 Mention the benefits of Central Bank digital Currency
 Highlight the possible challenges associated with Central Bank Digital Currency
 Suggest measures to mitigate the challenges associated with Central Bank Digital Currency
Conclusion:
 Conclude on the basis of above points

Answer:
Introduction
Central Bank Digital Currency (CBDC) is a legal tender backed by the central bank, offering stability and
programmable features. It is recognized as a liability on the central bank's balance sheet and its legality was
established through the amendment of the RBI Act in the Finance Act 2022.It is pegged to the value of that
country's fiat currency and adds digital form to existing physical form of bank note.
Body
Benefits of CBDC:
 Cost Reduction: CBDC issuance is expected to save significant costs associated with managing physical
cash, including security printing expenses (seigniorage costs).
 Digitalization: CBDC promotes the transition to a less cash-dependent economy, advancing the cause of
digitalization.
 Competition and Innovation: CBDC supports competition, efficiency, and innovation in the payments
sector.
 Cross-border Payments: CBDC usage can improve cross-border payment processes.
 Support financial inclusion: Attributes of a CBDC like offline functionality, universal access devices,
compatibility across multiple devices etc, shall make financial services more accessible to the unbanked
and underbanked population and in remote regions.
 Safeguard the trust of the common man in the national currency vis-à-vis proliferation of crypto
assets: The unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead
to creation of a parallel economy.
 Transparent and Private Payments: CBDC offers transparency, privacy, and finality in payment
transactions.
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 Supporting competition, efficiency and innovation in payments: CBDC could enhance resilience in
payments, and diversify the range of payment options. o For example, CBDCs can facilitate smooth
implementation of smart contracts for direct cash transfer to the farmers in India thereby ensuring
transparency
Potential Challenges in adopting CBDC in India:
 Cyber hacks and threats: CBDC ecosystems may be at similar risk for cyber-attacks as the current
payment systems are exposed to. Further, with lower financial literacy levels, the increase in digital
payment related frauds may also spread to CBDCs
 Threat to privacy: Anonymity is one of the key traits of cash, and the rise of digital payments threatens
the lawful or legitimate preference for anonymity as they leave digital trails.
 Impact on monetary policy: The high adoption of CBDC within a country’s financial system could
create unnecessary instability in the economy without proper measures.
 Technology preparedness: Lower level of technology adoption may limit the reach of CBDCs and add
to existing inequalities in terms of accessing financial products and services. Also, a large elderly educated
population is not comfortable with digital banking.
 Impact on bank credit availability: With the popularity of CBDCs, people may begin withdrawing
money from their bank accounts. With reduced disintermediation of banks, their ability for credit creation
gets constrained leading to an increase in cost of credit.
 Currency Substitution through cross-border transactions: Without proper international collaboration
and common framework (or standards), the ability of policymakers to track cross-border flows will be
limited.
 Bank runs to CBDC: An oft-cited risk to introducing CBDC is the risk of a bank run as depositors would
easily be able to transfer bank deposits to the Central Bank this would create a concept of flight of capital
within the banking system as well.
Way Forward
 Robust Regulatory Framework: Before adopting this technology and keeping it flexible to incorporate
dynamic learning in design of CBDC.
 Protecting Financial Markets: By addressing the implications of CBDC and other growing digital assets
with focus on consumers, investors, and business interests.
 Ensuring high standards of cybersecurity and parallel efforts on financial literacy is essential for
dealing with CBDC.
 Ensuring compliance to AML/CFT: A CBDC payment system would need to be compliant with Anti-
Money Laundering/Combating the Financing of Terrorism (AML and CFT) regulations and requirements.
 Assuring privacy: It will be essential to consider the way the privacy is respected, and the data is
protected in a CBDC system.
 Following BIS Principles: Design choices must be finalised keeping in mind the foundational principles
issued by the Bank for International Settlements (BIS) to be considered by central banks while issuing a
CBDC.
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Conclusion
Central Banks have acknowledged that they must advance in order to support this transition and adopt new
technology in light of the shifting payments landscape. The central bank would be unable to carry out
monetary policy if a private e-money issuer came to dominate payments in a nation and there was a clear
shift away from the fiat currency. In light of this, Central Banks are attempting to comprehend the financial
and economic effects of adopting their own digital currency. As a result, we might anticipate that our own
CBDC will soon be modified to better fit the Indian financial system.
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2. Priority Sector Lending in India faces several challenges. In this context, discuss its utility as a
policy instrument.
(150 Words, 10 Marks)
How to approach the question
Introduction:
 Briefly define Priority Sector Lending (PSL).
Body:
 Discuss the various challenges faced by PSL in India.
 Write about the utility of PSL.
Conclusion:
 Conclude accordingly.

Answer:
Introduction
Priority Sector Lending (PSL) mandates increased lending by the banks towards specified sectors and
activities in the economy, which may not get timely and adequate credit in the absence of this special
dispensation. Presently, categories under priority sector include Agriculture; Micro, Small and Medium
Enterprises; Export Credit; Education; Housing; Social Infrastructure; Renewable Energy; and Others.
The rate of interest on PSL loans is charged as per the directives of the RBI.
Body
Challenges with Priority Sector Lending in India:
 Sectoral issues: Doubling credit to PSL in the agricultural sector leads to an increase of just 11% of total
credit in the agricultural sector as compared to 76% in the export sector and 41% in manufacturing sector.
Also, the agricultural sector’s susceptibility to vagaries of monsoon increases the credit risks of banks
under PSL.
 Lethargy in lending: Most public sector banks have been continuously underperforming on the total
priority sector target. This may be due to difficulty in finding viable options to lend to the rural areas or
the MSME sector.
 Rising NPA: The Second Narasimham Committee (1998) observed that directed credit led to an increase
in non-performing loans and adversely affected the efficiency and profitability of banks. It stated that 47%
of all non-performing assets have come from the priority sector.
 Costs of PSL in India: It hinders the banks from expanding their scale of lending, consequently, affecting
the banking industry and the flow of credit in the economy as a whole. It also impacts the general lending
power of banks and deposit rate, which ultimately impacts the general public.
 Financial Burden of Banks: PSL results in money being taken away from the productive sectors, places
financial burdens on the banks in the form of loan losses and payment defaults, and also results in lost
opportunities for lending to non-priority economic sectors.
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Notwithstanding the challenges, PSL has proved useful for the following reasons:
 Promotes equity: It promotes social equity and facilitates increase in employment and investment in less
developed regions and gives an impetus to the vulnerable sections of the society.
 Balanced development: Direct lending allows the commercial banks to generate high social returns along
with profits and it also contributes to economic development by increasing investment in strategic sectors
like exports.
 Credit formalisation: It increases institutional credit (including commercial banks, cooperative banks
and societies) to the agriculture sector compared to non-institutional credit (such as money lenders).
Conclusion
Despite the challenges, the policy of priority sector lending (PSL) target has benefitted the vulnerable sections
of society, which though creditworthy, are unable to access the formal banking system for adequate and
timely credit. In this context, to make the PSL policy more effective, various steps such as Priority Sector
Lending Certificates, timely revised guidelines by the RBI, continued increase of the target under PSL
year-on-year, etc. have been taken, which are steps in the right direction.
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3. What are the challenges and benefits of the digital economy in India? What are some of the
government of India's efforts to promote the digital economy?
(150 Words, 10 Marks)

How to approach the question

Introduction:
 Define digital economy.
Body:
 Describe the advantages and limitations of the digital economy and mention the steps taken by the
Government of India in the desired direction.
Conclusion:
 Conclude the answer by suggesting a few measures by which India can strengthen its digital economy.
Answer:
The digital economy is the economic activity that results from billions of everyday online connections among
people, businesses, devices, data, and processes.
 The backbone of the digital economy is hyper-connectivity which means growing interconnectedness of
people, organizations, and machines that results from the Internet, mobile technology and the internet
of things (IoT).
Advantages of Digital Economy:
 Rise in E-commerce: The growth of e-commerce transactions in recent years can be attributed to the
digitalization of commercial activities. This digitalization has made developing, buying, distributing,
selling, and tracking products and services easier, more competitive, and more profitable.
 Digital Delivery of Goods and Services: The digital economy has enabled the digital delivery of goods
and services across various sectors. From aviation to banking, entertainment to education, and insurance
to hotel booking, people can easily access and obtain the goods and services they need online.
 Transparency: With major commercial transactions taking place online in the digital economy, cash
transactions are reduced, leading to increased transparency and a reduction in corruption. Online
transactions leave digital footprints, allowing for better tracking, auditing, and accountability.
 Expanding Business Opportunities: Digitalization has opened up opportunities for small firms and
businesses to actively participate in international trade.
 Through e-commerce platforms, they can engage in buying and selling goods and services globally,
expanding their market reach and potential customer base.
 Demographic Advantage: Proficient English-speaking and technology-savvy population in countries
like India facilitate adoption of digital systems.
 Positive effects on the economy, such as the widespread use of Unified Payments Interface (UPI)
and Direct Benefit Transfer (DBT) systems.
 Providing digital content and services in vernacular languages enhances accessibility and inclusivity.
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 Extension of Various Services: Digital economy enables re-evaluation and expansion of services sector,
both domestically and globally.
 Facilitates extension of services like medical and educational services.
 Mobile apps like UMANG offer a single platform for various government services.
 Other Significant Impacts: Creation of jobs and increased productivity at the local level.
 Improved access to services and opportunities for a larger population.
 Emergence of new business models and industries, such as e-commerce and digital payments.
Limitation of Digital Economy:
 Importance of Skilled Manpower: Developing a skilled workforce in the digital domain is crucial for
maximizing the potential of digital public infrastructure.
 Strengthening educational institutions to produce digitally literate workers is necessary to fully
leverage the advantages of digital infrastructure.
 Technological Backwardness and Inequality: The digital divide remains a significant challenge,
particularly in rural areas where access to digital services is limited.
 The digital economy has resulted in new forms of inequality, with some individuals benefiting more
than others.
 Cybercrime: The increased reliance on technology has led to a rise in cybercrime, including identity
theft, fraud, and money laundering, posing significant risks to individuals and businesses.
 Data Security: With businesses collecting large amounts of customer data, there is a higher risk of data
breaches and unauthorized access, compromising customer privacy and trust.
 Unemployment: Automation and technology advancements have resulted in job losses in certain sectors,
leading to increased unemployment and the need for workforce adaptation.
 Privacy Concerns: The extensive collection and use of personal data by businesses raise concerns about
the misuse and unauthorized sharing of sensitive information, compromising individual privacy.
 Heavy Investments: Digitization requires substantial investments in technology infrastructure and
resources, which can be challenging for small businesses with limited financial capabilities.
 Monopoly: The digital economy has facilitated the emergence of dominant companies with significant
market power, creating monopolies and limiting competition in certain sectors.
 Potential Environmental Impact: The rapid growth of the digital economy contributes to an increase in
electronic waste and energy consumption, resulting in a heavy carbon footprint and potential
environmental consequences.
Major Digital Initiatives in India:
 Digital Connectivity Initiatives:
 BharatNet Project: Connecting all villages in India with high-speed broadband by 2023.
 Centre for Excellence for Internet of Things (CoE-IT): Creating domain capability and innovative
applications.
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 Common Services Centres (CSCS): Delivery of public utility services.

 Cyber Swachhta Kendra: Detecting and securing systems from botnet infections.
 Digital Literacy and Identity Initiatives:
 Digital Saksharta Abhiyan (DISHA) Program: Ensuring digital literacy in households.
 Aadhar: Unique identity number for residents of India.
 Entrepreneurship and Business Initiatives:
 Startup India Program: Promoting entrepreneurship and startup ecosystem.
 DigiLocker: Digital wallet for citizens.
 Digitize India Platform: Digitizing scanned or physical documents.
 Services and Accessibility Initiatives:
 Accessible India Campaign and Mobile App: Ensuring accessibility for people with disabilities.
 Agrimarket App: Providing crop price information to farmers.
 BHIM (Bharat Interface For Money): Enabling quick and easy payments using UPI.
 Security and Governance Initiatives:
 Crime and Criminal Tracking Network & Systems (CCTNS): Nationwide tracking system for
crime investigation.
Way Forward:
 Promote Financial Inclusion and Security: Leverage connectivity advancements, like the JAM Trinity
(Jan Dhan Yojana, Aadhaar, Mobile), to improve financial inclusion and access to digital services.
 Emphasize the importance of secure and vigilant transactions to protect users' financial interests.
 Focus on Cybersecurity: Prioritize cybersecurity measures to ensure a high level of security in the digital
economy.
 Promote vigilance, proactive measures, and continuous assessment to address challenges associated
with the movement of funds in the digital landscape.
 Develop Digital Public Infrastructure and Skilled Workforce: Establish robust digital public
infrastructure while simultaneously investing in digital skilling initiatives.
 Ensure a skilled workforce capable of utilizing and benefiting from digital infrastructure to drive the
digital economy forward.
 Strengthen Transaction Security: Implement effective measures, such as One-Time Passwords (OTPs),
to enhance transaction security and provide users with a verification window.
 Continuously assess and improve security measures to mitigate risks associated with digital
transactions.
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4. With technological advancement, can it be said that the Indian banking system has finally
succeeded in paving its road to the last home? Also, discuss the role of niche banks in achieving
Financial Inclusion in India.
(250 Words, 15 Marks)

How to approach the question

Introduction:
 Briefly describe about the digital technologies developed to enhance bank’s reach
Body:
 Mention the technological inventions which helped banks in financial inclusion
 Highlight the obstacles that deterred the bank to reach last mile
 Mention the role played by niche banks in financial inclusion
Conclusion:
 Conclude on the basis of above points

Answer:
Introduction
The widespread democratisation of financial services has been made possible by the adoption and development
of digital technologies. The Banks' reach to the final home in particular is essential for a more extensive,
inclusive, and sustainable growth. India is the second-largest country in the world in terms of the number
of adults without a bank account, behind China, according to the RBI's Financial Inclusion Index (FI-
Index) 2023.
Due to the following technological intervention, Indian banks have been able to expand their reach
 Promotion of technology-based instruments: These include using legislative measures to boost internet
banking and mobile banking, motivating banks to supply smart cards and ATM cards, etc. ICT is a
necessity for business correspondents who convey goods to far-flung locations.
 Promotion of Payment infrastructure including pre-paid instruments: The RBI itself has NEFT and
RTGS. Prepaid instruments like mobile wallets and other similar devices may be issued by banks and
non-bank businesses like telecom firms.
 Direct Benefit Transfer: One of the largest developments that engaged and kept individuals in newly
formed accounts was the introduction of direct benefit transfers with the backing of Aadhaar and bank
accounts.
 Introduction of UPI: The NPCI developed UPI as a payment system to encourage online financial
transactions. It has enabled retail payments for online shopping, small-ticket money transfers for person-
to-person transactions( Bank -SHG linkage programme Aadhaar enabled payment system PMJDY:
Pradhan Mantri Jan Dhan Yojana)
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Despite the initiatives, the following obstacles have prevented Indian banks from reaching their final
destination:
 Inadequate infrastructure: Even while many rural residents now have access to mobile devices, they
still struggle to find options for affordable and trustworthy internet connectivity.
 Demand Side issues: Big numbers of unbanked people dispersed across a big geographic area, low skills,
unfamiliarity with technology, limited access to credit, high loan default rates, and a lack of financial
literacy are all problems that make the situation worse.
 Reluctance of Financial Institutions: Additionally, even financial institutions are hesitant to deal with
low-value and unprofitable clients; as a result, they view inclusion as a responsibility rather than an
opportunity.
 Cyber-Threat: The rural populace is further discouraged from participating in the digital economy by
the rising number of cyber security problems. Issues with delayed transfers and incorrect transfers through
direct benefit transfers have arisen.
Role played by these niche banks in promoting financial inclusion;
 Inclusion of the excluded population: Payment Banks serve low-income households, small businesses
and other unorganised entities by facilitating high volume and low value transactions in a secure and
technology-driven environment.
 Wider geographical coverage: Through their own branch network or Banking Correspondents or
through networks provided by others, these banks can have geographical reach to the most remote and
marginalised areas also.
 Specific targeting: Small Finance Banks focus and serve the needs of a certain demographic segment of
the population. They also provide various provisions of savings vehicles.
 Inclusion of small businesses: Small Finance Banks engage in basic banking service of acceptance of
deposits and lending activities to small farmers, small businesses, micro and small industries and
unorganised sector entities. This holds significance as a sizable chunk of India's workforce is employed
in such businesses.
 Services to migrant workforce: India has a huge labour force, which uses informal channels for fund
transfer. These channels are unreliable and charge hefty fees. Payment banks can, therefore, provide small
savings accounts and payments and remittance services to the migrant labour workforce.
Way Forward
Building a better delivery infrastructure that offers efficiency and security can be facilitated by eliminating
numerous layers of governance, utilising contemporary technology, improving benefactor participation,
and simplifying procedures. These niche banks have challenges like competition from Scheduled
Commercial Banks and Regional Rural Banks, their low cost technology driven operations and outreach is
making them a great vehicle for achieving the goal of financial inclusion, which can help India in reducing
poverty and income inequality as well reduce vulnerability to economic shocks.
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5. Analyse the effects of the 1991 LPG reforms in India. What lessons can be learned from it to
help India weather the current economic crisis?
(250 Words, 15 Marks)

How to approach the question

Introduction:
 Define the basic reasons or objective behind these reforms
Body:
 Mention the causes which led to the reforms of 1991
 Highlight the positive and negatives related to the reforms
 Highlight the lessons that can be drawn from 1991 reforms to overcome the present economic crisis
Conclusion:
 Conclude on the basis of above points

Answer:
Introduction
Economic reforms in India are the neo-liberal measures that the Narsimha-Rao government implemented in
1991, when India was experiencing a serious economic crisis brought on by its high level of external debt. So,
as part of the Economic Reforms, India accepted the LPG (Liberalisation, Privatisation, and Globalisation)
reforms. The main goal of this strategy was to make India's economy the fastest-growing economy in the world
with the capacity to compete with the largest economies in the world.
Body
Causes of the economic reforms of 1991:
 Licence raj: The "License Raj" or "Permit Raj" was the elaborate system of licences, regulations and
accompanying red tape that were required to set up and run businesses. This was largely executed through
the MRTP Act, 1969.
 Policy of import substitution: This policy advocated replacing imports with domestic production. This
led to the monopoly of Indian industries and lack of incentive for them to improve.
 A closed economy: The rupee was inconvertible and high tariffs and import licensing prevented foreign
goods reaching the market. The over-involvement of bureaucracy often led to absurd restrictions.
 Causes of Balance of Payment crisis: The immediate causes of the crisis included complacency caused
by Bombay High Oil discoveries, collapse of Rupee-Rouble trade following the dismantling of the Soviet
Union and crude oil price hike due to the Gulf War. This resulted in a BoP crisis
 Dismal Performance of PSUs: These were not performing well due to political interference and became
a big liability for the government.
 Payment Default: The Central Government was close to defaulting on its foreign payments.
 Drop in Foreign Exchange: The foreign exchange reserves dropped to a dangerous level alongside rise
in prices of essential goods.
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Impact of LPG reforms

Positive Impact
 Increase in Size of Indian Economy: Size of the Indian Economy has grown from about Rs. 6 lakh crore
to about Rs. 140 lakh crore.
 Increased Foreign Investments: With continuous liberalisation in the FDI and FlI, the collective
investment of the two have crossed $ 100 bn.
 Increase in Forex Reserves: Forex reserves in 2023 reached a record high crossing the $ 642 n mark.
 Exporter of Auto parts and Pharmaceuticals: India has become a successful exporter of auto parts,
pharmaceutical goods, engineering goods, IT software and textiles. As a corollary, the services sector has
shown significant growth post-1991.
 Development of Financial Market: Encouragement to the private sector led to development of a vibrant
capital and financial market.
 Rise of Middle class: Opening of the economy has shifted the demand-supply equilibrium upwards thus
resulting in increased consumption and rising middle class.
 Increased Social Spending: The rise in GDP and economic progress witnessed in the country ensured
that the government could take steps to address crucial issues such as poverty alleviation. Ex: Rolling out
programs like MGNREGA, NFSA etc.
 Borrowing from External Sources became easy: Liberalising norms related to borrowing from outside
led to raising of resources at a much cheaper rate without causing any great fluctuation in the domestic
market due to any inflation pressures
Negative Impacts
 Disproportionate Growth: Post-reforms economic growth was disproportionately led by the service
sector. The share of services in GDP has risen from 28% in 1950s, 44% in 1990s to 54% in 2000s.
 Unsustained Growth of Manufacturing sector: Reforms did not lead to sustained growth of the
manufacturing sector. After an acceleration in the mid-1990s, growth slowed in the decade’s second half.
Contribution of the manufacturing sector in GDP has remained almost stagnant.
 Decrease in Agriculture GVA: In 1991, agriculture provided employment to 72% of the population and
contributed 29.02 percent of the GDP. Now, the share of agriculture in the GDP has gone down drastically
to 18%. This has resulted in decrease in per capita income of the farmers and increase in the rural
indebtedness.
 MNC vs Local Business: Due to opening up of the Indian economy to foreign competition, more MNCs
started competing with local businesses. This led to highly unequal business competition.
 Job Loss due to Privatisation: Privatisation of government enterprises led to loss of jobs in the economy
and also loss of a constant source of revenue for the government if the public enterprise was managed
well.
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Lessons from the 1991 reforms to tide over the present crisis
 More freedom: Private businesses continue to struggle with the difficulty of conducting business in India
(delays in receiving government permissions, lengthy legal processes, etc.). To further enhance investor
confidence, which has been historically low due to factors like the global recession following 2008,
pandemic effect, demonetization, GST roll-out, etc The government should address these issues in its next
reforms.
 Diversified Privatisation: Diversified privatisation to complement privatisation with policies which
prevent concentration of wealth.
 Making Growth more inclusive: Moving from shareholder capitalism to stakeholder capitalism to make
growth more inclusive.
 Integrated Taxation System: Focusing on creating an integrated and progressive taxation system.
 Holistic Reforms: Holistic reforms in areas ranging from industry to labour to streamline the economic
climate of the country.
 Integrated Approach: Integrated approach to financial sector including banks, FinTech sector, financial
markets among others.
 Making States an Integral Part: With the evolution of India's political economy, the states need to be
an integral part of the reformation process.
 Taking into account SDG: Economic policy reform should take into account the ideas and targets
propagated by the SDGs.
 Social Sector Reforms: Should focus on- reducing wealth and income inequality by raising the minimum
wage, reducing gender pay gap, raising female labor force participation rate (FLFPR) and focus on health,
education and skilling.
 Agricultural Reforms: Should focus on- integration of the agricultural market, rationalisation of supply
chain, encouraging the formation of cooperatives and boosting agricultural exports.
 Capital account convertibility: Achieving greater capital account convertibility to ease the entry of the
companies in the market.
Conclusion
In order to develop a suitable approach that would lessen the economic hardship in New India, it will take
much more consideration, deeper study, analysis, and discussion to recreate the structural, institutional, and
policy features involved in LPG reforms in 1991.
