Former NITI Aayog vice-chairman Rajiv Kumar has cautioned that India's fast-growing digital payments ecosystem could suffer a setback if merchant UPI transactions are charged too soon or too broadly. In a sharp intervention that adds to the debate over payment economics, Kumar said the government should keep UPI merchant payments free for a few more years, arguing that even a small fee could alter user behaviour and push transactions back toward cash.
The warning comes at a sensitive moment for India's payments architecture. The government has announced a 0.4% merchant discount rate, or MDR, on UPI merchant payments above Rs 2,000 from October 15, while keeping consumer payments free. The move is intended to address the cost burden of running a high-volume, low-ticket digital payments network, but it has also revived concerns that charging merchants could weaken one of the world's most successful public digital infrastructure platforms.
Cash Risk Returns
Kumar's core argument is that UPI's scale has been built on a simple proposition: instant, frictionless payments with no visible cost to the consumer and, in most cases, no direct charge to the merchant. That model has helped UPI become the default payment rail for millions of Indians, from large retailers to small roadside vendors. Introducing a fee, he suggested, risks changing the psychology of acceptance, especially among price-sensitive merchants and customers.
The concern is not merely about the fee itself, but about the behavioural threshold it may create. In India's informal and semi-formal economy, even small transaction costs can influence whether a merchant encourages digital payments or nudges customers toward cash. Kumar's warning reflects a broader policy anxiety: once cash regains a foothold in everyday commerce, reversing that trend can be difficult.
Policy Trade-Off Widens
The government's decision highlights a familiar policy trade-off. On one side is the need to sustain the infrastructure that powers UPI, including banks, payment service providers and technology intermediaries that bear operating costs. On the other is the public policy objective of preserving the zero-cost user experience that helped digital payments scale rapidly after demonetisation and during the pandemic years.
For the state, the challenge is to avoid undermining adoption while ensuring the ecosystem remains commercially viable. UPI has become central not only to retail commerce but also to the broader formalisation of payments in sectors such as mobility, fuel, auto retail and electric vehicle charging. In these segments, digital acceptance has helped reduce friction, improve traceability and support faster settlement. Any policy that slows merchant adoption could have spillover effects beyond consumer convenience.
Industry participants have long argued that the economics of UPI need a durable funding model. Yet any attempt to introduce charges has historically drawn resistance from merchants, fintech firms and consumer advocates, who fear that the burden will ultimately be passed on to users. Kumar's intervention gives fresh political and policy weight to those concerns.
Digital Gains At Stake
The stakes are particularly high because UPI has become more than a payments product; it is a public digital utility. Its success has been built on trust, ubiquity and low friction. If merchants begin to view digital acceptance as costly, some may reduce incentives to promote UPI at the point of sale, especially for smaller-value purchases where margins are thin.
That risk matters for sectors linked to mobility and automotive retail, where digital payments are increasingly embedded in everyday transactions, from service bills to charging sessions and accessory purchases. A reversal toward cash in these touchpoints would not only slow the digitisation of commerce but also complicate record-keeping and customer experience.
Kumar's remarks therefore go beyond a narrow fee debate. They raise a larger question about how India should finance its digital public infrastructure without eroding the very adoption that made it successful. The government's next steps will be closely watched by merchants, banks, payment companies and consumers alike, as policymakers try to balance sustainability with scale.
For now, the message from one of India's most prominent policy voices is clear: UPI's zero-cost promise has been central to its rise, and tampering with that formula too early could carry consequences well beyond the payments industry.