In March 2017, in these pages, I argued that there was no justification for a Service provider Low cost Charge (MDR) on cellular funds, and {that a} less-cash India relied on retaining them free (Circumstances for a less-cash India, IE, March 4, 2017). That argument involved an toddler know-how; it now has contemporary urgency. Earlier this month, Parliament handed the Taxation and Different Legal guidelines (Modification) Invoice, 2026, rewriting Part 10A of the Fee and Settlement Methods Act. That part barred any cost on BHIM-UPI and RuPay. The modification replaces the bar with an enabling provision, permitting the federal government to inform sooner or later which modes can carry a cost. No cost is imposed right now. However the door has been unlocked, and we should always not stroll by way of it.
Contemplate what UPI has develop into. In 2025-26, it carried over 24,000 crore transactions — roughly 66 crore — value about Rs 314 lakh crore, accounting for some 85 per cent of India’s digital retail funds and almost half the world’s real-time funds. It’s overwhelmingly a system of small sums: The typical transaction is about Rs 1,300, and 86 per cent of service provider funds are beneath Rs 500. Such transactions contain the vegetable vendor, the auto driver, and the kirana store. A cost right here is just not a cost on commerce within the summary; it’s a levy on the smallest transactions of the poorest.
After Aadhaar gave each Indian a digital identification, UPI is our most seen piece of digital public infrastructure — in contrast to the identification proof, the citizen reaches for it many instances a day. It isn’t any firm’s product however an open, protocol-based public good — a brand new frequent language for cash. Earlier than UPI, every financial institution ran its personal closed app; UPI requested banks solely to open their APIs to a shared protocol, in order that any app can transfer cash between any two accounts at any two banks, immediately and free. It’s a mannequin the world is now finding out and adopting.
Why, then, is MDR the mistaken instrument? It’s an inheritance from the cardboard world, the place the issuer, acquirer and community every take a slice, and the place a bodily card, terminal and credit-default threat give the price one thing to get well. None of that exists on UPI: The purpose-of-sale machine is the shopper’s personal cellphone, on information he has paid for; there isn’t a card, no terminal, no credit score threat, and settlement is immediate.
Let’s apply the “work-done” precept telecom regulation makes use of for interconnection — a community is paid just for the work it performs. When A pays B, A’s financial institution makes a debit entry, the NPCI a settlement instruction, B’s financial institution a credit score entry; no money strikes. The NPCI runs the entire swap for about Rs 500 crore a yr — some two paise a transaction. The fee a price would get well has all however vanished.
None of this implies the system runs on air. Banks and cost suppliers bear actual prices, and underneath zero-MDR, they earn nothing straight from a UPI transaction. The federal government has bridged the hole with an incentive. However that bridge is being dismantled even because the visitors multiplies — the outlay is projected to fall to about Rs 437 crore from about Rs 3,631 crore two years in the past. The hole is actual. However MDR is the mistaken option to shut it, as a result of the financial savings UPI creates accrue to not the service provider we’d tax, however to the state and the banks.
Have a look at the state first, and conservatively: The Reserve Financial institution spends some Rs 5,000-6,400 crore a yr merely printing foreign money notes — greater than the federal government spends retaining UPI free — earlier than the price of storing and shifting money is even counted. Then take a look at the banks, the most important beneficiaries. A financial institution should serve its buyer someway, and the channels differ vastly in value: A counter transaction prices it Rs 40-50, an ATM withdrawal Rs 19 in interchange alone, whereas a UPI transaction is a small fraction of both. And by making an account as usable as money, UPI retains cash in accounts relatively than idle in pockets — the low-cost float on which banks earn their unfold and lend.
If digitisation saves the state and the banks such sums, the reply is to not claw cash from retailers and customers by way of MDR. It’s for the state — the steward of a sovereign public good, and not obliged to print and transfer the money, which UPI displaces — to return a small, outlined share of its financial savings to those that run the rails. This isn’t a grudging subsidy however cost for worth delivered, because the state pays a transmission firm to hold electrical energy: A clear, formula-based assist funded from the financial savings in foreign money administration, by no means a price ticket earlier than the citizen.
An MDR would even be self-defeating. India is very price-sensitive — if paying digitally prices even a rupee greater than money, many will return to money. A service provider charged MDR passes it on as “2 per cent further for digital”, or refuses digital altogether. Even 0.3 per cent on service provider funds would take some Rs 27,000 crore a yr out of a thin-margin retail economic system. To inform 100 crore customers that what was all the time free now prices cash is the surest option to sluggish, even reverse, a transition nonetheless forming: We might gather a bit and lose an awesome deal. And confining the cost to massive retailers gives no lasting safety — thresholds slip, and definitions widen.
India has achieved what no different nation has managed — made real-time digital cost free, immediate and common, pulling a whole bunch of hundreds of thousands into the formal economic system. That rests on a easy discount — paying digitally won’t ever value greater than money. Hold UPI free, fund it from the financial savings it so visibly creates, and it’ll repay the nation many instances over. That, not MDR, is the street to a really cashless India.
The author is a former secretary, Authorities of India. Views are private
