UPSC CARE Mains Practice 11th September 2025
Topic – Digital currency regulation in India
Q1. “India continues to resist a full-fledged regulatory framework for cryptocurrencies, citing systemic risks. Critically examine India’s cautious approach towards virtual digital assets in the context of global trends.” (15 marks, 250 words)
Introduction
Cryptocurrencies and stablecoins have emerged as disruptive innovations in the global financial system. While countries like the U.S. and Japan are developing regulatory frameworks, and China continues with bans alongside its digital Yuan project, India has opted for a cautious path. The government, supported by the Reserve Bank of India (RBI), fears systemic risks and dilution of monetary sovereignty if cryptocurrencies are fully legitimised. Indians already hold an estimated $4.5 billion in cryptocurrencies, yet the sector remains largely speculative and unregulated.
Body
- India’s Present Stance on Cryptocurrencies
- Risks Driving India’s Cautious Approach
- Global Approaches: A Comparative View
- Implications for India’s Economy and Innovation
- The Way Forward
Conclusion
India’s reluctance to frame a comprehensive cryptocurrency law reflects a pragmatic balancing of financial stability, consumer protection, and sovereignty. While global peers move towards cautious regulation, India is prioritising systemic safety over rapid liberalisation. The path ahead lies in strengthening CBDC, supporting blockchain innovation, and shaping global norms. A calibrated, risk-based regulatory stance will enable India to harness digital innovation without jeopardising its monetary stability or payment sovereignty.
UPSC Syllabus
Global financial system and its regulation
Why was this question asked?
Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (2018)
Introduction
Cryptocurrencies and stablecoins have emerged as disruptive innovations in the global financial system. While countries like the U.S. and Japan are developing regulatory frameworks, and China continues with bans alongside its digital Yuan project, India has opted for a cautious path. The government, supported by the Reserve Bank of India (RBI), fears systemic risks and dilution of monetary sovereignty if cryptocurrencies are fully legitimised. Indians already hold an estimated $4.5 billion in cryptocurrencies, yet the sector remains largely speculative and unregulated.
Body
India’s Present Stance on Cryptocurrencies
- India has refrained from enacting a comprehensive law on cryptocurrencies despite earlier drafts such as the 2021 Cryptocurrency and Regulation of Official Digital Currency Bill.
- The government relies on taxation, anti–money laundering provisions, and Prevention of Money Laundering Act (PMLA), 2002 coverage to exercise partial oversight.
- The 2022 Union Budget introduced a 30% tax on virtual digital asset gains and 1% TDS on transactions, which has acted as a deterrent against speculative trading.
- The RBI has maintained that allowing cryptocurrencies into the mainstream would “pose risks to financial stability,” as flagged in its Financial Stability Reports (FSR), 2022 and 2023.
Risks Driving India’s Cautious Approach
- Regulation could grant cryptocurrencies legitimacy and make them systemic, thereby threatening the monetary sovereignty of the rupee.
- Widespread use of U.S. dollar-backed stablecoins could entrench dollar dependence and weaken domestic payment systems like Unified Payments Interface (UPI), as noted in internal assessments following the G20 Finance Ministers’ Communiqué, 2023.
- Peer-to-peer trading and decentralised exchanges make enforcement extremely difficult, raising risks of illicit financing and terror funding, issues highlighted in FATF (Financial Action Task Force) reports.
- Volatility, frauds, and lack of intrinsic value expose small investors, a concern underscored in RBI’s Report on Trend and Progress of Banking in India, 2023.
Global Approaches: A Comparative View
- The United States enacted the GENIUS Act, 2025, creating a legal framework for stablecoins and encouraging their use in payment systems.
- China continues to ban private cryptocurrencies but is piloting the Digital Yuan (CBDC) under the People’s Bank of China (PBoC).
- Japan and Australia are building regulatory frameworks that allow usage with safeguards but stop short of promoting them.
- The IMF’s Global Financial Stability Report (2023) warned that unregulated crypto adoption could threaten emerging markets with currency substitution and capital flight.
Implications for India’s Economy and Innovation
- The current approach shields India’s regulated financial system from contagion, with crypto assets still not being a systemic risk.
- Protecting UPI and RuPay ensures digital sovereignty in payments, reinforcing India’s leadership in fintech diplomacy.
- However, excessive caution may discourage innovation and push Indian blockchain startups to relocate abroad, reducing competitiveness in the global fintech market.
- Taxation without regulation has shrunk volumes but also narrowed the potential tax base.
The Way Forward
- India should continue developing its Central Bank Digital Currency (CBDC or e₹), piloted by RBI since 2022, as a sovereign alternative to cryptocurrencies.
- A risk-differentiated regulatory framework should be considered, distinguishing between speculative tokens and fiat-pegged stablecoins.
- India must engage in global coordination under G20, IMF, and BIS frameworks to prevent regulatory arbitrage and cross-border risks.
- Blockchain innovation should be promoted in non-financial sectors such as supply chains, health, and governance, without legitimising speculative crypto assets.
Conclusion
India’s reluctance to frame a comprehensive cryptocurrency law reflects a pragmatic balancing of financial stability, consumer protection, and sovereignty. While global peers move towards cautious regulation, India is prioritising systemic safety over rapid liberalisation. The path ahead lies in strengthening CBDC, supporting blockchain innovation, and shaping global norms. A calibrated, risk-based regulatory stance will enable India to harness digital innovation without jeopardising its monetary stability or payment sovereignty.
Topic – India’s West Asia Policy
Q 2. The recent Israeli strikes on Doha have raised concerns about sovereignty violations in the Gulf. Discuss the implications of this episode for India’s relations with Qatar and Israel, highlighting the challenges and opportunities in balancing strategic interests. (15 marks, 250 words)
Introduction
The Israeli airstrikes on Hamas officials in Doha (Qatar), a rare breach of a Gulf state’s sovereignty, sparked widespread international condemnation. India expressed “deep concern,” with the Prime Minister condemning the violation of sovereignty and urging resolution through dialogue and diplomacy. This episode highlights the delicate balance India must strike: Qatar is a key energy supplier and host to nearly 7.5 lakh Indians, while Israel is a critical defense and technology partner. The crisis tests India’s ability to pursue principled pragmatism in West Asia, a region central to its energy, diaspora, and strategic interests.
Body
- Sovereignty and Principles of International Law
- India–Qatar Relations: Energy and Diaspora
- India–Israel Relations: Defense and Strategic
- India’s Diplomatic Balancing Act in West Asia
- Strategic Implications for India
Conclusion
The Israeli strikes on Doha underline the volatility of West Asia and the high stakes for India. By condemning sovereignty violations while calling for dialogue, India demonstrated a careful balance of principle and pragmatism. Moving forward, India must safeguard its diaspora, secure its energy lifelines, deepen defense ties, and remain a credible voice for peace. Such an approach will ensure India’s strategic autonomy and preserve its role as a trusted partner to both Gulf states and Israel in a conflict-prone neighborhood.UPSC Syllabus
India’s West Asia Policy
Why was this question asked?
Q. The question of India’s Energy Security constitutes the most important part of India’s economic progress. Analyze India’s energy policy cooperation with West Asian Countries. [2016]
Introduction
The Israeli airstrikes on Hamas officials in Doha (Qatar), a rare breach of a Gulf state’s sovereignty, sparked widespread international condemnation. India expressed “deep concern,” with the Prime Minister condemning the violation of sovereignty and urging resolution through dialogue and diplomacy. This episode highlights the delicate balance India must strike: Qatar is a key energy supplier and host to nearly 7.5 lakh Indians, while Israel is a critical defense and technology partner. The crisis tests India’s ability to pursue principled pragmatism in West Asia, a region central to its energy, diaspora, and strategic interests.
Body
Sovereignty and Principles of International Law
- The strikes violated Article 2(4) of the UN Charter, which prohibits the use of force against the territorial integrity of states.
- India’s response was consistent with its long-held foreign policy tradition of non-interference and respect for sovereignty, a legacy of the Non-Aligned Movement.
- By condemning the violation without directly naming Israel, India reaffirmed its credibility as a supporter of international law while retaining diplomatic flexibility.
India–Qatar Relations: Energy and Diaspora Nexus
- Qatar supplies nearly 40% of India’s LNG imports, making it central to India’s clean energy transition.
- Around 7.5 lakh Indians live in Qatar, part of the 8.5 million Indians in the GCC, whose remittances form over 50% of India’s total inward remittances.
- Instability in Qatar directly endangers this diaspora and energy security.
- Qatar’s active mediation role in Gaza peace talks complements India’s consistent support for peaceful resolution of the Palestine issue.
India–Israel Relations: Defense and Strategic Convergence
- Israel is India’s third-largest defense supplier, providing drones, missile defense systems, and precision-guided munitions critical for modernization.
- Close cooperation exists in counter-terrorism, intelligence sharing, agriculture, and water management.
- The 2017 visit of the Indian Prime Minister to Israel, the first ever, marked a new phase of visible strategic partnership.
- Yet, India cannot appear to unconditionally align with Israel without risking alienation from Gulf partners.
India’s Diplomatic Balancing Act in West Asia
- Since the 1990s, India has pursued a “multi-vector” policy: strengthening ties with Israel while expanding Gulf partnerships.
- The Look West Policy (2005) and its later Act West dimension emphasized diaspora protection, energy, and strategic outreach.
- Historically, India recognized the PLO in 1974, supported Palestine’s UN membership bid in 2011, and continues to back a two-state solution, even as it deepens ties with Israel.
- India’s calibrated reaction to Doha reflects this dual track: defending sovereignty while keeping defense ties with Israel intact.
Strategic Implications for India
- The Doha strikes illustrate the fragility of Gulf stability, which directly impacts India’s energy flows and expatriate safety.
- India must build energy resilience through diversification, while leveraging its balanced ties to enhance credibility as a stabilizing actor.
- This crisis also provides scope for track-II diplomacy, where India can utilize goodwill with both Qatar and Israel to contribute to regional peace.
- Balancing energy-diaspora security with defense-technology cooperation will remain the cornerstone of India’s West Asia strategy.
Conclusion
The Israeli strikes on Doha underline the volatility of West Asia and the high stakes for India. By condemning sovereignty violations while calling for dialogue, India demonstrated a careful balance of principle and pragmatism. Moving forward, India must safeguard its diaspora, secure its energy lifelines, deepen defense ties, and remain a credible voice for peace. Such an approach will ensure India’s strategic autonomy and preserve its role as a trusted partner to both Gulf states and Israel in a conflict-prone neighborhood.