Former NITI Aayog vice-chairman Rajiv Kumar has cautioned that India risks undoing years of progress in digital payments if merchants are asked to absorb even a modest fee on UPI transactions. Speaking on the government's decision to impose a 0.4% merchant discount rate, or MDR, on UPI payments above Rs 2,000 from October 15, Kumar argued that the policy could discourage acceptance at the point of sale and nudge consumers back toward cash.
Cash Risk Warning
Kumar's intervention is significant because it comes from one of the country's most prominent policy voices on economic reform and digital inclusion. His central argument is straightforward: UPI's rapid rise has been built on the promise of frictionless, zero-cost payments for users and low operational barriers for merchants. Introducing a fee, he suggested, may appear small in percentage terms but could have an outsized behavioural impact in a market where price sensitivity remains high and cash still retains deep familiarity.
India's Unified Payments Interface has become the backbone of retail digital payments, powering billions of monthly transactions and transforming how consumers pay for everything from groceries to fuel. The system's success has been tied not only to convenience but also to the absence of charges for users, which helped accelerate adoption across urban and semi-urban India. Kumar's warning reflects a broader policy concern: once a payment rail becomes associated with cost, merchants may begin steering customers toward cash or alternative modes that preserve margins.
Policy Trade-Offs
The government's move to levy MDR on merchant UPI transactions above Rs 2,000 marks a notable shift in the economics of digital payments. While consumer payments remain free, the charge on merchants raises questions about who ultimately bears the cost. In practice, merchants may pass the fee on to customers, absorb it in reduced margins, or adjust acceptance behaviour depending on transaction size and business model.
That trade-off is especially sensitive in sectors where margins are thin and ticket sizes vary widely, including mobility, fuel retail, repair services and small-format commerce. For the automotive and mobility ecosystem, where UPI has become a routine payment method for servicing, accessories, parking and ride-related purchases, any friction in acceptance could matter. Small merchants and service providers often operate on narrow spreads and may be reluctant to accept a payment method that introduces even limited cost or compliance complexity.
Kumar's warning also lands at a time when policymakers are trying to balance two competing goals: sustaining the scale of India's digital public infrastructure while ensuring the payments ecosystem remains commercially viable. Banks and payment intermediaries have long argued that the infrastructure behind UPI carries real costs, even if consumers do not see them directly. The challenge for the government is to preserve adoption without creating incentives that weaken the network effect that made UPI dominant in the first place.
Digital Gains At Stake
The concern is not merely about one fee schedule. It is about the psychology of payment adoption. India's digital payments revolution has depended on convenience, trust and habit. If merchants begin to prefer cash for certain transactions, the system could fragment at the margins, particularly among smaller businesses and price-conscious consumers. That would be a setback for formalisation efforts and for the broader push to reduce cash dependence in the economy.
Kumar's call for UPI merchant payments to remain free for a few more years suggests a phased approach: preserve the current incentive structure long enough for digital behaviour to become more deeply embedded before introducing charges. Supporters of such a view argue that premature monetisation could slow the transition at precisely the moment when UPI is becoming a default payment layer across India's retail economy.
The government has not indicated any reversal of the new MDR framework, and the policy is set to take effect on October 15. But Kumar's remarks are likely to intensify debate over whether the long-term health of India's payments ecosystem is better served by keeping UPI largely free, or by gradually shifting part of the cost burden to merchants and the institutions that support the network. For now, the warning from a former top economic policymaker is clear: even a small charge could have a large behavioural cost.