Misaligned incentives threaten to upset India's digital infra apple cart

Passing digital costs to users sends the wrong signal--cash is cheaper. India must align economics with policy to realise its DPI vision

India’s digital journey has been nothing short of transformational. The country has built world-class digital public infrastructure (DPI) in areas such as identity (Aadhaar), payments (Unified Payments Interface), and financial inclusion (the Jan Dhan-Aadhaar-Mobile trinity). These foundational platforms have reduced friction across sectors and empowered citizens across socio-economic strata. Now, with the emergence of domain-specific digital public infrastructures such as the Open Network for Digital Commerce, the Ayushman Bharat Digital Mission in healthcare, and digital agriculture initiatives, India is set to redefine how markets, services, and innovation scale in an inclusive manner.

 

But while the infrastructure is robust, misaligned incentives threaten to limit the potential of these digital rails. Simply put, in many everyday scenarios, digital payments cost more than cash — a paradox that undercuts the idea of a cashless economy.

 

Take the case of UPI. In May, it clocked nearly 19 billion transactions worth over ₹25 trillion. UPI has surpassed all other instruments in both volume and reach, becoming the primary mode of payment for millions. Its success is no accident — it is free to use, both for peer-to-peer and merchant payments.

 

What goes unacknowledged is that UPI also reduces the systemic cost of currency management. The Reserve Bank of India and commercial banks together spend around 0.15–0.2 per cent of currency in circulation annually on printing, distributing, and securing cash — particularly small-denomination notes. UPI displaces much of this burden through instant, traceable micropayments. From a macro level, it is a strategic tool for formalisation, transparency, and fiscal efficiency. Given these benefits, one would expect digital payments to be actively incentivised. Yet in practice, users are often penalised for going digital.

 

The convenience fee conundrum: Consider railway ticket bookings. A passenger using the railways’ online portal and UPI pays a ₹15–30 “convenience fee” per ticket, while paying in cash at a counter is free. Similar discrepancies exist in electricity and property tax payments, exam fees, FASTag recharges, and airline bookings — where digital payments attract charges but offline transactions do not.

 

This reverse incentive structure impacts price-sensitive consumers and first-time digital users. The logic behind charging convenience fees — usually to recover payment gateway costs — is understandable. But it ignores the cost savings that digital modes bring to service providers: Reduced queue management, lower reconciliation errors, faster settlement, and minimised cash handling. The cost of payments to the gateways and software providers is miniscule compared to these savings. When public-facing entities externalise digital transaction costs to users, the message to consumers becomes clear: Cash is cheaper.

 

The GST misalignment: The disincentive also extends to how digital-first business models are taxed. Take passenger transport services, for example. Under GST rules, non-AC contract carriages are exempt from GST, but aggregators like Uber and Ola must pay GST on the full fare under Section 9(5) of the Central GST Act. This distinction is logical — they control the transaction life cycle from matching the passenger with the driver and collecting the fare. But confusion arises with platform-as-a-service (PaaS) models—digital platforms that enable discovery but do not process payments or provide the service themselves. These platforms charge a small facilitation fee from users but are now being asked to pay GST on the entire transaction value, including the fare, even though they do not deliver the service or handle payments.

 

This is akin to asking Google to pay tax on every product purchased after a user clicks a search result. As ONDC and other discovery-layer DPIs expand to health, agriculture, and logistics, such classification mismatches could severely throttle innovation.

 

This growing mismatch between policy objectives and ground-level incentives requires urgent correction. Here’s a pragmatic road map:

 

Mandate zero convenience fees for public digital transactions: Central and state ministries, public sector units, and regulated utilities should be prohibited from levying digital-only charges for essential services. Where digital reduces operational cost, it must not be passed on to the user.

 

Reform the zero-MDR framework: The zero merchant discount rate policy was critical in UPI adoption. But as the system matures, a tiered MDR model — where micro-merchants remain exempt but larger businesses contribute nominally — can help payment service providers remain commercially viable and reinvest in infrastructure.

 

Enforce payment mode parity: The RBI, National Payments Corporation of India, and sector regulators must enforce pricing neutrality across payment modes. A digital transaction should never cost more than an offline one.

 

Correct GST treatment for SAAS & PAAS: Tax rules must distinguish between full-stack aggregators and digital facilitators. Only entities that control the transaction end-to-end and collect the payment should be liable for GST on the total fare. A principled classification of platforms under GST is urgently needed to prevent stifling DPI-enabled business models.

 

Beyond infrastructure: A behavioural shift: India has already laid the tracks of a truly inclusive digital economy. But we must ensure that these rails are accessible by default—not priced as a premium. That calls for more than infrastructure — it demands aligned incentives, consumer trust, and coherent policy signals.  At its core, this is not a technology problem. It is an economic design challenge. When consumers and service providers see tangible value in choosing digital —we won’t need to push digital. It will be the default. If we fail to course-correct now, we risk hollowing out the transformative promise of DPI. A digital economy cannot be built on a foundation where progress is penalised, and legacy behaviours are rewarded. The time to align incentives with intention is now.

The author is former secretary, department of electronics & IT, GoI. The views are personal