A day after India’s finance minister Nirmala Sitharaman introduced the Taxation and Other Laws (Amendment) Bill in Parliament proposing changes to the Payment and Settlement Systems Act of 2007 that would let banks and payment system providers charge fees on UPI and RuPay debit-card payments, Reserve Bank of India (RBI) Governor Sanjay Malhotra made a pointed reference to such fees.
In response to a question posed at RBI’s post-policy conference, he pointed out that costs have to be borne by someone.
“Ultimately, it is the consumer, in some way or the other, who is paying [for] it already. It may not be the same consumer, it may be the general economy, and you don’t get to see it directly… Somehow, it is already getting passed on; it may not be directly on the user-pays principle.”
This principle applies to much public infrastructure, be it physical or digital.
Coincidentally, this week also saw Chief Economic Advisor V. Anantha Nageswaran call out free services, saying ‘free’ is “the most expensive word in public policy.” He pointed out that infrastructure built on the promise of free or below-cost services cannot attract patient capital.
The latter demands durable returns, which rest on two basic premises: a price that covers the economic cost of the service and users willing to pay a fair charge. Unfortunately, this point often gets lost in the context of public amenities. The country’s freebie culture, for example, fosters perceptions of the state owing people these.
Yet, there is no free lunch. It is thus imperative that the cost of public infrastructure (as distinct from pure public goods such as law-and-order and defence that need taxpayer money) is recoverable if we wish to sustain investment in India’s infra build-up.
The Unified Payments Interface (UPI), run by National Payments Corporation of India, would therefore need to recover costs too, be it the base platform’s digital expenses or bills borne by apps and the network of banks that transfer money from one account to another. Set up under RBI’s aegis, UPI was initially made charge-free for users to spur adoption, but it has achieved high penetration now.
Those who want UPI kept free forever argue that it is widely seen as a cash substitute, not a bank service, and should stay so. There is no denying its benefits at both the micro level (convenience) and macro level (transactions brought into the formal system), so a fee must not end up slowing down UPI usage.
Today, the government subsidizes payments of up to ₹2,000 made to small merchants through an incentive scheme to promote RuPay and low-value Bhim-UPI transactions. This public outlay goes to banks, payment service providers and third-party app providers.
But according to a March report by the Standing Committee on Finance, a parliamentary panel, the total subsidy paid from 2021-22 to 2024-25 at ₹8,730 crore was “only 11% of the cost incurred by the digital payment industry,” which implies an annual cost of about ₹20,000 crore. This is no trifle.
A good solution would be to charge a nominal merchant discount of 0.3-0.6% on UPI transactions for large merchants, who may pass it on to customers, while keeping transfers under a certain limit exempt. For vast multitudes, it would still be like cash. Once RBI’s e-rupee takes off as the currency’s de facto digital clone (it being a direct liability of the central bank), UPI could gradually be made a fully charged service.