Let UPI stay successful as a special public good
No service is costless but some deserve a public subsidy. While UPI is our prime mover in the online payments space, we could also count on an RBI-issued e-rupee to help us go cashless
India stands out for two things as far as online payments go. First, we have a veritable alphabet soup of mechanisms: from RTGS and NEFT to IMPS and UPI. For the sake of user clarity, this needs sorting out. The other is the remarkable success of our ‘India Stack’, the building blocks of digital enablers with Aadhaar identification at their base that have wowed global observers. Yet, we have moved so fast—with a central bank digital currency on its way too—that telling signals apart from noise has grown difficult. Take the debate over whether merchants should part with a sliver of the money they’re paid via the National Payments Corp of India’s (NPCI) Unified Payments Interface (UPI), which shifts cash from one bank account to another by using verified phone numbers. Starting 2020, to spur cashless transactions, the Centre nixed a 0.3% fee on deal value (or ₹100 if lower) that recipients had to pay. UPI transfers have skyrocketed since then. As UPI operations are not costless, incurring about 0.25% on such swipes, as estimated by the Reserve Bank of India (RBI), and central funds to compensate financial intermediaries for it have fallen short, our bank regulator has been keen to restore some sort of charge. For any system to sustain itself, goes the argument, it must not burden private players. True as this is, generally speaking, the government’s case for a charge-free UPI is more compelling.
On 21 August, the finance ministry described UPI as a “digital public good”, given its convenience for users and potential gains for our economy. This is arguably the appropriate lens for this issue. A public good is one that satisfies a need and is free for anyone to use. In the classic view of economists, any hint of such a good’s scarcity would lead to significant over-exploitation, resulting in a net drop in welfare. However, the work of Elinor Ostrom, who won a Nobel prize in economics for her analysis of common resources, found that users tend to work out a balance of restraint on their own in their collective self-interest. And a resource arrangement that works in practice ought to work in theory too. Happily, what marks digital services apart is the huge scale of supply that can be achieved at minimal cost. In UPI’s case, there is no such thing as overuse. Since we have deemed going cashless a good thing, it would suit us all for the Centre to pick up the tab of its operational expense. Yes, payment volumes will likely swell beyond an annual ₹120 trillion, so its subsidy bill could bloat to over ₹30,000 crore in 2023-24. But online transfers need to mimic cash as closely as possible if they are to serve a public cause.
That said, other modes of online payment, especially those which are costlier to operate and used for larger sums, need not be state-subsidized. Since NPCI’s Rupay card was launched as a rival to Visa and Mastercard networks, it should charge merchants a fee and act only as a cost competitor. This way, the state can focus on UPI as our market penetrator. Whether this role should be taken over by RBI’s e-rupee, due soon, is another question we will need to confront. ‘Smart money’ usage, thanks to an e-currency that can be instructed to move as told, could be made chargeable even as basic transfers are kept free. If this e-rupee is to substitute cash, then it would also need to assure us anonymity of use. A public good must not double up as a surveillance tool. In general, as money evolves, our best bet would be to let public utility lead the way.
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First Published:23 Aug 2022, 09:32 PM IST
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