Former NITI Aayog vice-chairman Rajiv Kumar has warned that India risks undermining one of its most successful digital public infrastructure gains if it begins charging merchants for UPI transactions too soon. In a sharp intervention on the government's latest payments policy, Kumar argued that UPI merchant payments should remain free for a few more years, saying even a small fee could alter user behaviour and nudge transactions back toward cash.
The warning comes at a sensitive moment for India's digital payments ecosystem. 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-side UPI payments free. The move is intended to support the economics of the payments system and provide some revenue support to intermediaries, but it has also revived a long-running debate over how to sustain UPI without weakening the very adoption that made it dominant.
Fee Risk Debate
Kumar's central argument is that UPI's scale has been built on a simple proposition: instant, low-friction payments with no visible cost to the user. In his view, introducing merchant charges too early could create a psychological and commercial barrier, especially for small businesses and price-sensitive consumers. He cautioned that if merchants pass on the cost, or if users perceive digital payments as less attractive than cash, the system could lose momentum in the very segments where it has been expanding fastest.
That concern is not merely theoretical. India's digital payments revolution has depended on trust, convenience and near-zero transaction friction. UPI has become the default rail for millions of everyday purchases, from retail shopping to mobility-linked transactions such as fuel, parking, ride-hailing and EV charging. Any policy that changes the cost structure risks rippling through these use cases, particularly among smaller merchants who operate on thin margins and are highly sensitive to payment acceptance costs.
Kumar's remarks also reflect a broader policy tension: how to balance scale with sustainability. UPI has been promoted as a public utility-like platform, but the infrastructure behind it is not free to operate. Banks, payment service providers and technology intermediaries incur costs in maintaining uptime, fraud controls, settlement systems and customer support. The government's decision to allow MDR on higher-value merchant transactions appears aimed at addressing those costs without burdening consumers directly. Yet critics argue that once fees are introduced, even selectively, the principle of free digital acceptance may begin to erode.
Cash Return Fears
The former policymaker's warning that users could drift back to cash is especially relevant in India's smaller cities and informal economy, where payment habits are still evolving. For many merchants, cash remains attractive because it is immediate, familiar and free of transaction charges. If digital acceptance becomes more expensive, some businesses may quietly incentivise cash or impose minimum digital transaction thresholds, both of which could slow the broader formalisation of payments.
This is particularly significant for the mobility and automotive ecosystem, where UPI has become embedded across a wide range of transactions. From vehicle servicing and spare parts to charging networks and shared mobility services, digital payments have reduced friction and improved traceability. A fee on merchant transactions could complicate adoption in these sectors if operators decide to absorb the cost, pass it on, or restrict digital acceptance for smaller-ticket purchases.
The government has not indicated that consumer payments will be charged, and that distinction matters. But in practice, merchant economics often shape consumer behaviour. If a shopkeeper prefers cash, or if a service provider adds a surcharge to digital payments, the end user may not experience UPI as free in any meaningful sense. That is why Kumar's intervention is likely to resonate with fintech advocates and small-business groups who fear that policy changes could slow the next phase of digital penetration.
Policy Balance Ahead
The immediate question is whether the new MDR framework can be implemented without denting UPI's growth trajectory. Supporters of the move argue that a mature payments ecosystem needs a viable commercial model and that a narrowly targeted fee on larger merchant transactions is a reasonable compromise. Opponents counter that UPI's public-good character has been central to its success and that India should continue subsidising acceptance until digital payments are deeply entrenched across the economy.
Kumar's call for patience suggests that the government may need to weigh short-term revenue considerations against long-term behavioural effects. UPI is not just a payments tool; it is now a foundational layer for commerce, mobility and financial inclusion. Any policy shift that raises the cost of acceptance, even modestly, could have consequences far beyond the payments industry itself.
For now, the debate is less about whether UPI has succeeded than about how to preserve that success. Kumar's warning is a reminder that in digital public infrastructure, pricing is never merely technical. It can shape trust, adoption and the direction of the entire market.