Ever since Finance Minister Nirmala Sitharaman announced the development of Central Bank Digital Currency in 2022-23, the RBI has been advancing rapidly on this front. It has launched both rCBDC, the retail version, and wCBDC, the wholesale version, and partnered with commercial banks to drive the world’s second largest CBDC pilot programme.
For many central banks, a CBDC ‘killer app’ which is indispensable in the function or service it provides, remains elusive. Even in India, existing alternatives are cheap and convenient. For retail payments, UPI and Immediate Payment Service systems far outpace rCBDC transactions, while robust market infrastructure for securities settlement in the form of the Clearing Corporation of India Limited has meant that wCBDC uptake has been minimal.
In response, Indian authorities have identified a novel use-case for CBDCs: bolster existing government subsidy schemes and welfare payments, which form the backbone of the country’s social safety net. In a global first, authorities are developing CBDC-based systems that transfer resources directly to end-users, or the Direct Benefit Transfer model, but utilise novel digital infrastructure, such as Distributed Ledger Technology. Here, Central and State Governments transfer CBDC units, or ‘tokens’, to beneficiaries’ digital wallets designed for this purpose, rather than crediting their bank accounts.
Notably, these tokens are programmed, which means that their usage is restricted by design. For example, in an ongoing pilot in Puducherry, recipients have been provided CBDC tokens under the Pradhan Mantri Garib Kalyan Anna Yojna. They can only be used to purchase foodgrains at authorised merchants.
At the time of writing, as many as 10 such pilots are underway across various states, involving a variety of entities, including the RBI, commercial banks, the central government, state governments, and even multilateral entities. By pre-determining how funds can be spent – setting geographical limits and expiry dates – programmed CBDCs can enable efficient, targeted, and time-bound delivery of welfare. Taken forward, India’s programmable CBDC experiment could reshape how governments deliver aid globally.
This novel use-case places India at the technological frontier. However, latent risks tied to scale and thus not immediately apparent in pilot programmes warrant careful consideration.
Prime among them is the “singleness of money”, which is that all forms of money, physical cash or bank deposits, trade at the same value. Programmable CBDCs may lack this. The intrinsic value of programmed tokens, such as how many goods or services they can purchase, depends on how they have been programmed. For ₹1000 worth of cash, its owner is free to spend it as they wish. On the other hand, ₹1000 of programmed tokens may only be used at a given shop, in a specific location, and expire within days. If the value of programmed tokens diverges from the value of physical currency, it could erode public trust in the very concept of money.
Programmable money also represents a unique confluence of fiscal and monetary policy. Welfare policy operates in the realm of fiscal policy as it involves public resources funded by taxes or public debt. The management of public money, on the other hand, is undertaken by the central bank. A programmed CBDC token occupies novel middle ground. It is issued by the central bank, but programmed by the government for a specific use, location, or period of time.
At a macro level, if programmed tokens are issued at scale, the central bank's balance sheet will hold liabilities whose effective value is determined by fiscal policy. This would undermine central bank independence and constitute a departure from the separation of fiscal and monetary functions that underpins modern economic policy.
At the micro level, accountability gaps can emerge. If a token fails due to authentication errors or expired deadlines, does the responsibility lie with the issuing central bank, the commercial bank or the government authority? A clear institutional demarcation between the issuer, operator, and programming entity is necessary to maintain trust.
Programmability can also pose operational challenges. Maintaining a list of pre-approved merchants for each type of subsidised product is a complex task which is likely beyond the remit of the government or central bank. Even minor snags, such as a pre-selected shop being closed during a token’s validity, can impose hardship for recipients.
Further, while the Finance Act of 2022 amended the RBI Act to define CBDC as a banknote in digital form, conferring legal tender status, it is worth asking whether tokens restricted in their use, location, and validity period also meet that standard. A related question is how programmed CBDC would be included in RBI’s monetary aggregates. Expiring CBDC tokens could introduce volatility into these statistics, as their value will drop to zero upon expiration.
Programmable CBDCs sit at the intersection of monetary design, fiscal policy, and social welfare delivery, a combination that existing policy frameworks were not built to handle simultaneously. The questions they raise, from the singleness of money to central bank independence, from accountability gaps to legal status, are structural, not just technical. India has the opportunity to answer them at scale, and on its own terms, and likely before the rest of the world. How it does so will define not just the future of welfare delivery, but that of public money itself.
*Views expressed are the author’s own.
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