Let UPI stay successful as a special public good

Source: The post is based on the article “Let UPI stay successful as a special public good” published in Live Mint on 24^th August 2022.

Syllabus: GS 3 – Economy

Relevance: Issues associated with UPI.

News: 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.

What is the current situation of India in online payment?

India’s present digital payment system is featured by following 2 points:

First, we have confusing payment mechanisms: from RTGS and NEFT to IMPS and UPI.

Second, ‘India Stack’ has been remarkably successful. It is the building block for digital enablers with Aadhaar identification at its base.

What is the issue with the UPI payments?

Merchants are paid very less from 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.

Centre ended a 0.3% fee on deal value (or ₹100 if lower) that recipients had to pay to boost cashless transactions.

As estimated by the RBI, UPI transactions cost 0.25% of transactions and central funds to compensate financial intermediaries for it have fallen short.

For any system to sustain itself it must not burden private players.

UPI as a Digital Public Good and concerns associated with it

The finance ministry described UPI as a “digital public good” due its convenience for users and potential gains for our economy.

A public good is one that satisfies a need and is free for anyone to use. According to economists, any scarcity of such goods would lead to over-exploitation which will result in a net drop in welfare.

Concerns: The payment volumes will likely go beyond an annual ₹120 trillion, so its subsidy bill could increase over ₹30,000 crore in 2023-24. In order to cut the cost of the subsidy, it will be better for the Centre to come up with the operational expense of the UPI payments.

What should be the course of action for government?

The state should not subsidize other modes of online payment, especially those which are costlier to operate and used for larger sum.

Rupay card which is operated by NPCI was launched as a rival to Visa and Mastercard networks. It should charge merchants a fee and act only as a cost competitor.

‘Smart money’ usage can be made chargeable even as basic transfers are kept free.