Discuss the role of the RBI's surplus transfer mechanism in supporting India's digital public infrastructure. Should RBI subsidise platforms like UPI directly?

Q. Discuss the role of the RBI's surplus transfer mechanism in supporting India's digital public infrastructure. Should RBI subsidise platforms like UPI directly? (15 marks, 250-350 words)

UPI, now the world's largest real-time payment system accounting for nearly half of global real-time transactions [4], runs free for users because Section 10A of the Payment and Settlement Systems Act, 2007 bars charges on prescribed electronic modes [1]. With a Bill now proposing to relax that mandate, the RBI's record surplus transfer has been offered as an alternative funding route — a fiscally feasible but institutionally problematic idea.

How the surplus mechanism currently supports DPI - Under Section 47 of the RBI Act, 1934, the RBI transfers its residual income to the Centre — a record ₹2.86 lakh crore for 2025-26, about 6.7% above the previous year [3]. - This is indirect support: the surplus enters the Consolidated Fund and finances, among other things, the Centre's incentive scheme for low-value BHIM-UPI (P2M) transactions, which reimburses banks at 0.15% per transaction for small-merchant payments [2]. - Fiscal headroom clearly exists — the cost of running UPI free is a small fraction of the annual surplus, and surplus growth has outpaced UPI's transaction growth.

Case for direct RBI subsidy - UPI is a public good; charging merchants risks cash-back substitution and hurts small traders and first-time users, diluting financial inclusion gains. - Costs today fall on banks and NPCI with only partial reimbursement, making the ecosystem financially strained.

Case against - RBI surplus is residual, volatile and not budgeted revenue — it depends on forex and bond income and on the Contingent Risk Buffer retained under the Economic Capital Framework; a recurring subsidy on a volatile base is unsound. - Direct subsidy makes the regulator a funder of an entity it regulates, blurring accountability and bypassing parliamentary appropriation.

The surplus should support digital public infrastructure, but through the Budget, not the RBI's own balance sheet. A transparent, appropriated outlay — with any future MDR calibrated to spare small merchants — preserves both UPI's inclusive character and the RBI's regulatory neutrality.

(~325 words)

Sources: 1. Section 10A, Payment and Settlement Systems Act, 2007 — India Code — statutory bar on charges for prescribed electronic payment modes 2. Cabinet approves Incentive Scheme for promotion of low-value BHIM-UPI transactions (P2M) — PIB — 0.15% per-transaction reimbursement to banks for small-merchant UPI 3. RBI approves record ₹2.86 lakh crore surplus transfer to Central Government for FY 2025-26 — Akashvani News (Prasar Bharati) — surplus figure and 6.7% year-on-year rise 4. UPI recognised as world's largest real-time payment system by IMF; 49% of global transactions — PIB — scale of UPI as digital public infrastructure