In the last few years, the trend of online payment has increased tremendously and it is increasing unabated. Names like UPI, BHIM, PhonePe, Paytm etc. are being heard in every household today. It is true that the trend of online, i.e., digital payments has increased all over the world but it has increased the most in India. Digital transactions worth 20,000 crores are being made every day. In March 2022, this amount had reached Rs 10 lakh crore.

According to the data released by the National Payments Corporation of India (NPCI), 628 crore transactions worth Rs 10.62 lakh crores took place in the country in the month of July. The number of these payments has doubled in the past one year, while the total amount of digital payments has increased by a record 75 per cent.

Benefits of digital payments

Today without opening one’s wallet, one can do transactions from one rupee to thousands and even lakhs in a few seconds with just a click of the mobile. By being careful while making the transaction, very quick and secure payment is made, with no fraud possible. Although there is a minor charge for transfer of funds from banks, till now there is no charge for payment through Unified Payments Interface (UPI). In this way the transactions become easy and cost effective.

The transaction being free of cost, means economising the cost of doing business. It is true that the cost of business drives up the prices and goods and services become expensive. In such a situation, if the transaction of money is done in a convenient way without cost, it becomes economical to provide goods and services at lower prices, and the profit of the business will increase.

Convenience in business is the most important dimension of reducing transaction costs. The facility of payment also helps to expand the business. Today we see that even tiny sellers accept online payments by putting ‘QR Code’ on their small shops or even on their carts (rehris). With convenience to customers, the convenience of business also improves.

Talks of charge on digital payments

Recently, the Reserve Bank of India has sought public opinion about the imposition of charges on digital payments from the public. With that, the debate has started as to whether it would be a right move to impose fees on digital payments. Along with this, there is also opposition to even this opinion seeking. To silence this opposition, the Finance Ministry has issued a statement that at present the government has no intention of imposing charges on digital transactions. In this regard, other measures, including government support, will be considered to compensate the loss to service providers.

Why fee on digital payment not a good idea

Transaction cost is a major part of cost in the production and distribution of goods and services. Significantly, the higher the transaction cost, higher would be the price of the goods or services.

The importance of transaction costs in economics is shown by the fact that in 2009, the winner of the Nobel Prize in Economics, Oliver Williamson, was known as a ‘transaction cost economist’, and he presented his analysis on various aspects of transaction cost. But if the importance of transaction cost is to be understood, then it is necessary to have an economic analysis and investigation of this subject, that if a fee is imposed on digital payments, then how much will it increase the price of the final goods and services ultimately. We shouldn’t forget, that similar to indirect taxes, fee on digital transactions may lead to cascading effect on prices of goods and services.

The Finance Ministry also said in its statement that the digital payment system is a ‘public good’, for which it is necessary to make provision from the government budget itself. In economics, we classify goods and services as ‘public goods’ and ‘private goods’. The theory says that pure public goods, such as defence, law and order etc., are such that users can’t be excluded in enjoying those services. In case of other public goods, where exclusion is possible, provision of digital transactions to one doesn’t come in way of providing this facility to others.

In case of digital transactions with imposing charge we can exclude those who don’t pay for the same. However, digital transactions by one in no way hinders the usage of digital transactions by others. Therefore, if a good or service satisfies any one of the two characteristics, namely non excludability and non-rivalness, it’s a public good; and if a public good is provided by the government, it will be more beneficial to the society.

Digital transactions is such a service; if non-payers are turned away from that service by imposing a fee, it does not benefit the society in any way. Our digital payment system is already in place, and marginal cost of providing an additional digital transaction is almost zero, so if we exclude those people from digital payments who are not able or willing to pay the fee, then it will cause harm to the society, by way of increasing cost; and will therefore increase the cost and inconvenience. Therefore, this statement of the Finance Ministry is welcome.

Recently, the Prime Minister said that due to the convenience of digital payments in India and due to the mobile revolution in the country, more than 40 percent of digital transactions around the world take place in India. Naturally, due to the convenience of digital payments and the fact that they are free, the cost and price of India products and services have definitely come down. As long as digital payments remain free, the competitiveness of India exports will be better and India’s exports will increase. Even if the government had to make provision from the budget to keep digital payments free, it would be a good expenditure. At the same time, no objection can be filed by other countries in the World Trade Organization also, as it’s not discriminatory.

India can become world’s digital hub

Today, India has not only moved ahead in digital transactions, but has also achieved self-reliance in the same. National Payment Corporation of India (NPCI) operates ‘RuPay Card’ and it handles all digital banking transactions. NPCI also operates the Unified Payments Interface. Thus, NPCI acts as a digital bridge between customers and business with the help of UPI, facilitating personal and business transactions both. UPI coordinates all service providers in digital payments. Through UPI, we can transfer money without sharing any sensitive information related to our bank account and that too at zero cost. Today, the example of India’s UPI is being given in the world and it is being judged much better than the payment systems of USA, European and other countries.

In such a situation, when India is leading the world in digital payments, and countries of the world are getting ready to adopt India’s UPI, it would not be judicious to hinder this trajectory by imposing digital payment fee in India. Moreover, recently Russia and India joined hands for digital payments, by integrating RuPay of India and Mir of Russia. In such a situation, if other countries also cooperate in digital transactions with India, then the Indian rupee will also get more attraction. There is a need to make India the digital hub of the world, and therefore all support from the government in this endeavour is the need of the hour.

The author is a Professor at PGDAV College, University of Delhi, Delhi