Insights on current policy issues in India
—RSJ
Happy 80th Independence Day!
Over the years, we have written Independence Day specials with a sense of hope and optimism. We celebrate what has gone right and, for a day, allow ourselves to feel the joy and responsibility of being part of something larger than our everyday lives.
As we remind our readers, we write about India the way we do because we care about India. This time around, I am in a tad more pensive frame of mind as I hear the neighbourhood RWAs blasting “sandese aate hain” and “dil diya hai jaan bhi denge” to arouse patriotic fervour. At 80, what kind of an India are we building? We inherited a nation that was imagined by people who lived in a very different, and difficult, time.
We will hand it over to those who will live in a world we cannot fully appreciate. Bookended between the generations that have gone before and the generations that have not arrived sits both our dharohar and our responsibility. How are we faring on it? I don’t have answers. But I think we might get better at this responsibility if we think about it a bit differently.
The easy way out of thinking critically about India is by imagining it as our motherland. Once you have the image of Bharat Mata for our nation, there’s only room for reverence. Of course, there is a lot of merit in such emotional resonance for the nation, especially when it is in peril. But is that the default mode that we should operate in? I suggest that when it comes to thinking about our responsibility, we should think of India as our child as well.
As much as you love your child (perhaps even more than your mother), you are also worried about it and its future. You are not oblivious to your child’s weakness. You notice where the child is falling behind. You worry about whether the child is acquiring the skills needed for the future and how it will cope without you. Is it developing resilience, whether it has enough discipline and curiosity, and whether it has the right blend of confidence and anxiety to do well in the future? You tell the child stories about the family and its history because those root them in their tradition and give them a sense of identity. But you don’t tell the child that because the grandparent was remarkable, the child is going to be remarkable too. The past should provide inspiration, not bragging rights.
We need more of this instinct in how we think about India. We should be able to love the country deeply and still be honest about where it falls short. If someone points out a weakness in your child, your instinct is to find out whether the weakness exists and, if it does, to help the child overcome it. You don’t (or shouldn’t) blame the person for noticing the problem. We will build a better future if we can tolerate criticism of our present. At 80, we should spend more time asking: are our institutions getting better, are our young people learning faster and becoming more capable of dealing with the changes coming our way? The past should give us confidence. But it should also make us more demanding about the future.
So, I don’t mind if we want to sing Vande Mataram before the national anthem for all events. Do whatever floats your boat. But after singing that ode to the nation as your mother, just remember only for a moment that the nation is your child too.
A nation is, in Benedict Anderson’s phrase, an imagined community. Most of us will never meet most other Indians. Yet we imagine ourselves as members of the same community and organise our lives around that belief. The founders of our nation had a capacious, all-welcoming imagination of this community. They had to persuade people who often had very little in common in their everyday lives that they belonged to one project. Back in 1947, what did India mean to the many millions living their lives in small villages of various princely states, in deep forests or in provinces ruled by the Raj? Precious little. We had to work to create that big tent and that sense of belonging. And it has been hard work
The progress we have made in living up to that vast imagination is precious.
We can lose it easily. We can become smaller without losing any territory when we narrow that imagination of who belongs to this nation. Once we start administering the purity test and asking whether some Indians are sufficiently Indian, we compromise the imagined community we inherited. The danger with tests of purity is that there is always another test lying in wait. With more exacting standards and willing to exclude another group. This is a never-ending cascade.
We should be vehement in opposing the idea of the “other” within India. The task of nation-building is to continually persuade those who feel left out that the larger community belongs to them as much as it belongs to everyone else. Not to push them out of the community. The Indian project was always to expand that circle of belonging. This expansion isn’t appeasement or a concession to diversity. It is core to preserving the idea of India itself.
That used to be the tourism India ad back in the 80s. There is only one way to know India, and that is to go out and see it.
India is beautiful, diverse and full of surprises. Travel around to experience its landscapes, its mountains, forests, rivers and beaches. Learn about it first-hand at historical sites, forts and palaces. Visit its temples, mosques, churches and monasteries to see how messy, complicated and beautiful our past is. Spend time in cities that are not your own and in small towns where most of our fellow Indians live. Meet other Indians as much as you can. Talk to them and listen to what they want from their lives. Ask them what is changing, what is getting better and what remains difficult.
Most of us now get to learn about India second-hand. There are reels, social media posts, WhatsApp messages and algorithms that feed you information about India. Your algorithm may be feeding you an extraordinary amount of information about India without you encountering real India itself. The algorithm will push you deeper into an echo chamber where you find people who agree with you, read the arguments they make and become increasingly certain that those arguments represent reality. We may have made enormous progress (more so in the last 12 years if you so believe), but we still have a lot to learn and a great deal to build. There is little value in thinking we have arrived and that the world now learns from us. Experiencing physical India is the best way of disrupting this certainty. Regular trips to real India, that’s not appearing on your phone, will keep you grounded.
Over the last 150 years or so, some of the finest Indian minds have spent their lives thinking about what India is and what it should become. Tagore, Gandhi, Ambedkar, Vivekananda, Aurobindo, Nehru, Kosambi, Savarkar, Radhakrishnan, Kakkar and many others approached the question from different perspectives. They were deeply knowledgeable about India’s history, traditions and social structures, while also engaging with modern political philosophy and ideas that were emerging from Europe and elsewhere. These were not deracinated Indians copying the latest intellectual fashion of the day.
They engaged with the question of what defines us. About that common thread, however nebulous at times, that runs through centuries binding us. They debated on what could be carried forward, what needed to change and what had to be rejected. They took India’s inheritance seriously enough to interrogate it.
The Constituent Assembly debates are the most apt example of this. The people who drafted the Constitution were not working in an intellectual vacuum. They knew that they were trying to construct a modern republic on the foundations of an old civilisation. So they debated quite extensively what should be preserved and what should change. In today’s times, we often behave as if these debates never happened and that our ancient culture and tradition were buried by some kind of colonial mindset. Going back and re-reading them will open our eyes and save us a lot of time.
This does not mean that we should accept all their conclusions. We should disagree and challenge their current relevance. But there is a difference between disagreeing with an intellectual tradition after understanding it and rediscovering an argument that has already been made and debated for a hundred years. Before deciding that nobody has thought about a question, it is worth checking whether we have read the people who thought about it most seriously.
The first four points lead, in some ways, to the fifth. If we think of India as something for which we are responsible, if we understand the imagination of the community we have inherited, if we go out and experience the country and if we read the people who have thought deeply about it, then we acquire something that is essential to building a successful nation: the ability to make up our own minds.
We are often given sermons about getting rid of the colonial mindset. Fine, we should do that. But we should think about colonisation of our minds in a broader way. We might have minds that still think based on frames set up by our old colonial masters. How are we sure our minds today aren’t colonised by a particular political thought or an ideological ecosystem which is enveloping us through the surround sound of TV studios, social media, education curriculum changes and complicit social and political institutions?
To be free is to retain the capacity to think for yourself. It is about the courage and patience to listen to people you disagree with. And about changing your mind when presented with evidence that goes against your original position. We should be free to hold our views, express them and debate others with whom we disagree in a manner that moves the nation forward. We should build a society that questions those in power and updates its priors based on facts.
What we do with our freedom is our foremost responsibility. We can celebrate it every year while losing chunks of it because we haven’t paused to think deeply about it. The best we could do this Independence Day is to reflect on this. At 80, India still remains an act of magical imagination that we must all cherish.
P.S.: One of the most popular editions of this newsletter is #181 We Shall Overcome, an Independence Day special, in which we picked out one defining event of every year of independent India. Worth revisiting if you are looking for a leisurely Sunday read.
Insights on current policy issues in India
—Pranay Kotasthane
This week saw many articles and opinions on whether UPI should remain free. As usual, another public finance issue was discussed without much heed to what that discipline has to say about it. So let’s get to the basics.
The trigger was that the two houses of Parliament passed a bill that, amongst other things, reverses the outright ban on any charges on UPI transactions. Why such a ban was hard-coded into law is a debate for another day. With the amendment, a “UPI and Services Steering Committee” headed by NPCI will decide the nature and threshold of transactions for which a fee might apply. The government put out a press release with three claims: first, UPI will remain free for citizens. Second, there will be no charges on everyday transactions on citizens. And third, any future MDR will be nominal, and only on a limited set of merchant transactions.”
Nevertheless, this began a spate of opinions and articles defending the ban on charging a transaction fee, primarily on the grounds that the benefits of keeping UPI free far outweigh the benefits of allowing firms to raise revenue from transactions. Some argued that government subsidising the UPI infrastructure is justified, while payment service providers and banks should instead focus on making money at layers above the payment layer.
This position got me thinking that in a world where industrial policy is becoming the default policy response across the world, we will have to justify every act of pricing resources according to their nature and scarcity. What’s odd is that this is happening despite a generation that knows more economics than the one before it.
Trace the argument people use, and you can see the sophistication rising even as the conclusions stay wrong. A decade ago, the case for free water and free electricity leaned on a mangled idea of “public goods”, that anything important enough, the reasoning went, should be free, because it’s for the public. That version was easy to puncture, as water and electricity are rivalrous and excludable. There’s nothing “public good” about them in the technical sense. The critique worked, and fewer informed people call these items public goods.
But the argument has come back using other economic ideas. Now the framing is positive externalities and “public infrastructure”. UPI is a network, the argument goes. Networks have massive spillover benefits, i.e., more users make the system more valuable to everyone already on it, so charging anyone for using it is fighting a positive externality.
This evolution, though an improvement, is still wrong. Here’s why.
A positive externality is the gap between what a transaction is worth to the people directly in it and what it’s worth to everyone else who benefits without paying. For example, your COVID-19 vaccination benefits not just you but also the people around you. Similarly, the credit-data trail your UPI payment leaves eventually helps some lender assess some small business. Thus, it is quite correct that such goods will be underprovided left to their own devices.
But the correction public finance literature prescribes is a subsidy sized to that spillover, at the margin, not a zero price on the whole transaction. Nobody derives “make it fully free” from “has externalities” for any other good in the economy. Vaccines have textbook positive externalities, and India still runs mixed free/priced programmes depending on the vaccine and the income bracket. Water, electricity, and transport—other forms of public infrastructure — are also not free. If we apply this thinking to UPI, even the most generous assumptions about its social benefits do not justify an indefinite blanket exemption for every transaction of every size forever.
I have thus far made a case that some government subsidy for the UPI protocol itself and interoperability (not the transactions) makes sense. But there’s another reason why keeping this subsidy at the bare minimum is a good idea.
The debate on UPI charges is often framed as “how much should the government pay to keep this free”, as if the only question is sizing the cheque. The right question is which arrangement best aligns the incentives of all stakeholders. Here again, public finance literature has a clear answer. Services are best provided when there is a high overlap between those who benefit, those who decide, and those who pay. That’s the logic behind user charges. Water isn’t free because paying for it disciplines consumption by increasing the overlap of the three factors listed above. Electricity works the same way. The exceptions—a subsidised block for the poorest users—are deliberate, bounded departures from the default.
Applying that test to UPI clarifies the picture. The externality-justified piece is funding the protocol layer because the beneficiary there is diffused (all of society gains from a functioning payments backbone). The payer (the exchequer, funded by general taxation) is a reasonable proxy for that diffuse beneficiary.
Alignment breaks when you treat every transaction, forever, as entitled to the same subsidy regardless of who’s making it or how often. Without a way to charge for transactions, payment service providers are already underinvesting in cybersecurity, protocol improvements, resilience, fraud prevention, and next-gen infrastructure. To secure the benefits of these services, it is legitimate to ask merchants to pay a user fee.
There’s another complication the “it’s just a network, marginal cost is zero” crowd has ignored. UPI infrastructure is no longer even non-rivalrous. It increasingly behaves like a congested resource. The system has logged repeated outages tied directly to capacity being overwhelmed. Last year, NPCI was defining peak hours and throttling non-essential API calls specifically to protect the rails from overload. This makes UPI a congestible good, and rationing scarce capacity demands removal of the ban.
Congestion also reopens the switch-monopoly question. The standard defence of NPCI running the only switch treats this as a given: the protocol has to be open and interoperable, so a second switch operator could never recoup the fixed cost of building one, since it can’t lock in any bank that can freely use the incumbent instead. Several proposals to license alternative switches have gone nowhere on roughly this logic.
But that argument conflates two different things—a standardised, open protocol and a single, monopoly switch clearing every message through it. Those don’t have to be the same layer. For instance, the EU’s SEPA Instant Credit Transfer scheme is an open rulebook implemented by multiple competing clearing operators all interoperating through a defined framework between them. Banks pick which clearing operator to connect through, or connect to more than one. The protocol is one, but the switches are many.
A single switch means a single point of failure. Multiple switch operators on the same protocol would spread that load, and would let banks choose which switch to route through based on reliability and service quality, restoring some of the beneficiary-decider-payer overlap that a single subsidised monopoly switch erodes by default. Competition then becomes a tool for funding and discipline.
Put the two arguments together and a specific design results. Some subsidy is legitimate—for the protocol, its maintenance, and its improvements. But zero MDR for every transaction indefinitely funded by an incentive scheme that Parliament tops up fails the alignment test. A threshold that exempts small transactions makes sense on cost-recovery grounds.
Above the threshold, the fee should fall on merchant transactions specifically, not peer-to-peer transfers (as the government press release suggests), and it should lean toward a flat per-transaction charge rather than a percentage of value. An ad valorem MDR taxes large transactions hardest, which is exactly where the credit-data and formalisation externality is most valuable. None of this is really about the ₹2,000 crore in the budget, or the ₹10,000-15,000 crore industry wants instead. It's about applying well-known ideas in public finance.
Reading and listening recommendations on public policy matters
[Podcast] In the Independence Day spirit, we were on our favourite podcast —Amit Varma’s The Seen and the Unseen. The three of us discussed some hits and misses of independent India that have shaped our thinking. Give it a listen.
[YouTube Show] Over at Watching the Wheels too, we recorded an Independence Day Special, but this one has our wishlist for the future.
[Course] We Indians often think that we understand the American politico-economic system, but we really don't. So some folks at Takshashila have put together a course that explains the logic, checks & balances, and the frictions in that system. Check it out.
[Dashboard] The folks at WRI India have created a brilliant dashboard for mobility in Indian cities. Worth taking a look.
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