All about political capital

A fee on UPI transactions is economically logical, but it reflects the govt's evolving approach to one of its key political constituencies

Sharp views have been expressed from different quarters over why and how the government has decided to levy a fee or a merchant discount rate (MDR) on some transactions conducted via the Unified Payments Interface (UPI) platform. The government’s argument has been that it is a small fee, to be imposed on only a very small share of transactions by volume. Individuals are exempt from the fee. And most importantly, the fee is needed to help reimburse UPI operators the cost they incur to run this digital public infrastructure, keeping it safe, secure and technologically updated.

 

Those who have opposed the imposition of the fee (they are some of the powerful political voices in the country) have argued that UPI payments without a fee have grown rapidly, are people-friendly, and the payment system has encouraged people to move away from cash, leading to greater formalisation. The growing use of UPI, they have pointed out, has heralded India’s arrival as a strong player in the world of instant payments without cash — a facility that as many as 11 countries have embraced and more countries are expected to adopt.

 

Opponents of the government move to levy a fee have also argued that continuing to keep UPI payments free from the MDR would help this system grow even more rapidly and yield economic gains far greater than the burden of subsidies the government would bear.

 

Has the government gone wrong in its assessment and taken an inappropriate decision? To answer this question, it is important to understand the nature of this debate and controversy. More importantly, the ongoing debate must be situated in the current political context by comparing it with similar controversies in the recent past.

 

There are two prisms through which this debate must be viewed: Economic policy and political economy. As an economic-policy decision, there is practically nothing wrong in the government’s idea of imposing a small levy on UPI transactions. Remember that from UPI’s launch in April 2016 until December 2019, there had been a levy on such transactions. The Modi government decided to make it free from January 2020 to improve its popularity and increase its adoption. This decision was taken before the outbreak of Covid, but its use grew rapidly during and after the pandemic. The free UPI payment system, therefore, has run for well over six and a half years, during which period the government has spent about ₹12,000 crore on subsidising the payment system.

 

From an economic-policy standpoint, continuing to subsidise the payment system does not appear either logical or justifiable even though it is a public good. Not all public goods need to be subsidised and a selective approach to levying a charge on such services is unexceptionable. There is also no merit in the argument that the Reserve Bank of India should step in and use a small part of its annual surplus it generates to fund the expenditure needed to operate and maintain UPI.

 

Evaluating the decision on levying the MDR on UPI payments through the political economy prism offers a slightly different perspective. Governments in recent years have shied away from taking hard economic decisions, apprehending political resistance. The Manmohan Singh government had allowed 51 per cent foreign equity in multibrand retail but succumbed to political pressure and subjected that decision to the concurrence of states, where such foreign investments were to take place. The Narendra Modi government, too, followed that principle and introduced more conditions before any foreign investment could take place in multibrand retail. Political opposition compelled the Modi government to put a few of its bold plans into cold storage. These included moves on relaxing the land acquisition norms of the 2013 statute and reforming agricultural laws to allow smoother market access for farmers, facilitate contract farming, and ease controls under the essential commodities law. All these moves had strong economic logic, but they could not make headway because of political headwinds.

 

Similarly, the decision on imposing the MDR on UPI transactions has strong economic logic, even though there are valid concerns over why the government did not build an environment conducive to its rollout by holding consultations and taking on board the stakeholders (like the merchants’ associations) who would be adversely affected by the move. Interestingly, however, the Modi government has gone ahead with its MDR move despite the likely political challenges it would face. Therefore, the economic logic of the MDR move is not what should be debated. Instead, what should be debated is the decision’s political justification. That is also where the arguments get a little complex.

 

Over the past several years, the Modi government has shown reluctance to exhaust even a part of its formidable political capital to push through economic decisions that might be a little unpalatable to its constituencies, including farmers and the poor. Even though the poverty count has been coming down, the government has continued with its free foodgrain supply to over 800 million Indians.  Reforms of land acquisition rules and agricultural laws have been deferred. Labour law reforms were notified after about five years of their legislation. The coverage of the mandatory social security benefits through the employees’ provident funds scheme was expanded only after 14 years. To be sure, the Modi government has taken many decisions on reforms in a wide range of areas.  But it has avoided or moved slowly on reforms that could potentially risk its political capital.

 

What stands out in the government’s decision to levy a fee on UPI transactions is the willingness to risk its political capital. In a departure from its earlier reluctance to take any decision that might upset shopkeepers, the government now appears to be open to the idea of imposing a levy that could antagonise large sections of small traders. Note that the Swadeshi Jagaran Manch, an economic and cultural affiliate of the Rashtriya Swayamsevak Sangh, has made public its strong opposition to the move to charge for UPI transactions.

 

So far, the Modi government has shown no signs of rolling back its decision in this matter. If the new MDR regime is rolled out from the middle of next month, as scheduled, it should count as one of the boldest political actions by the Bharatiya Janata Party government on an economic-policy issue, and a signal that it is less worried about erosion of  political capital it draws from one of its key constituencies.  If there is a review, it will once again show that retail trade is still a sensitive area for the BJP, and give indications of how it wishes to further strengthen its political capital from this segment. Either way, political considerations surrounding the MDR issue will outweigh its economic logic.