Former NITI Aayog vice-chairman Rajiv Kumar has warned that even a modest charge on UPI merchant payments could undermine one of India's most important digital public infrastructure gains and encourage a partial return to cash. Speaking in the context of the government's decision to impose a 0.4% merchant discount rate, or MDR, on UPI transactions above Rs 2,000 from October 15, Kumar argued that the policy risks weakening the very behaviour the state has spent years trying to build.
Cashless Momentum
Kumar's concern goes to the heart of India's payments strategy. UPI has become the country's dominant retail payment rail because it is fast, interoperable and, crucially, free for users. That zero-cost structure helped convert millions of consumers and small merchants from cash to digital transactions, especially after the pandemic accelerated adoption. Any fee, Kumar suggested, may appear small on paper but could be enough to alter merchant incentives and consumer habits at the margin.
The government's latest move preserves free payments for consumers, but shifts the cost burden to merchants for higher-value transactions. While the policy is limited in scope, it has reopened a familiar debate over who should pay for the infrastructure that powers India's digital economy. For small businesses operating on thin margins, even a fractional charge can matter, particularly if they process a high volume of low-ticket sales. Kumar's warning reflects a broader fear among digital payments advocates that once a fee is introduced, the psychological barrier to using cash may begin to erode.
Merchant Cost Pressure
The MDR decision is likely to be scrutinised not only as a revenue or cost-recovery measure, but also as a behavioural signal. UPI's success has depended on a simple proposition: digital payments are easier than cash and do not add visible cost to the user. If merchants begin to absorb a fee on qualifying transactions, some may respond by steering customers toward cash, especially in price-sensitive segments such as neighbourhood retail, food services and informal trade.
That possibility matters because India's payments ecosystem is still uneven. Large urban merchants and organised retail chains are better equipped to absorb compliance and transaction costs, but smaller traders often operate with little room to spare. A policy that appears neutral at the national level can have very different effects on the ground, where cash remains deeply embedded in daily commerce. Kumar's intervention suggests that the government should be cautious about any step that could slow the shift away from cash before digital habits become fully entrenched.
The timing of the announcement is also significant. UPI has become central not only to consumer convenience but also to the broader policy narrative around formalisation, transparency and financial inclusion. Any perception that the system is becoming more expensive to use could weaken confidence among merchants who have only recently adopted QR-based payments at scale. For policymakers, the challenge is to preserve the network effects of UPI without creating a cost structure that discourages participation.
Policy Trade-Offs Ahead
Kumar urged the government to keep UPI merchant payments free for a few more years, implying that the ecosystem is not yet mature enough to withstand even limited pricing. That argument reflects a classic policy trade-off: whether to prioritise short-term cost recovery or long-term adoption. Supporters of fees may argue that payment infrastructure must eventually be funded sustainably. Critics counter that premature monetisation could slow the transition that made UPI a global model for digital public infrastructure.
The debate is likely to intensify as the October 15 implementation date approaches. Industry participants, merchants and payments platforms will be watching closely for clarifications on how the MDR will be applied, which transactions will qualify, and whether the policy could be revised if it triggers unintended consequences. For now, Kumar's remarks have sharpened the political and economic stakes around a system that has become one of India's most visible digital success stories.
At issue is not merely a transaction fee, but the future direction of India's payments landscape. If the government wants UPI to remain the default choice for everyday commerce, it may need to balance fiscal considerations against the risk that even a small charge could revive the very cash dependence the system was designed to reduce.