Government Must Reconsider Fee on UPI Transactions

The NPCI has revolutionised the Indian payment gateway landscape by popularising UPI and the RuPay network. NPCI has effectively ended the duopoly of American giants Visa and Mastercard in the payment gateway business in India. Today, a significant portion of transactions is processed via the Indian RuPay network, and it's a remarkable achievement. About 65% of total 700 million debit cards and 18% of credit cards of total 119 million are issued by Rupay. About 40% of total credit card transactions volume and 8% of value is processed by the Rupay network.

This shift has been financed by the Government of India, as the government has been bearing the costs and facing international pressure to curb this subsidy. This has obviously created a market with distortions which heavily depend on government subsidies. In the long term, such a market cannot sustain itself. So it is logical for the government to make UPI self-sufficient, but timing doesn’t seem to be opportune. India is going through a difficult phase post the volatile situation in the Middle East and tariff risks from the US. Economic activities are expected to cool down in the coming months. In this situation, any fall in domestic consumption and GST collection would be costly for the economy.

To make UPI self-sufficient and sustainable, the government is now preparing to levy a small fee known as the Merchant Discount Rate (MDR) on UPI transactions, which merchants would be required to pay. At present, UPI users and small merchants are supposed to pay this charge. This fee could amount to around half a per cent or even less, but with huge consequences for the Indian economy. The government believes this measure will help reduce its own expenses while making UPI and NPCI self-sustaining. However, it appears that the government is ignoring the ground realities.

Shopkeepers have already largely stopped accepting UPI payments via RuPay credit cards precisely because of the fees associated with them, or charging 1% extra on RuPay Credit Cards UPI payments. Now, if an MDR is imposed on UPI transactions linked to bank accounts as well, merchants would stop accepting UPI payments altogether, a move that would deal a severe blow to the economy. Even consumers would also shift to cash as this cost would be finally passed on to consumers. This might be insignificant in comparison to prices of goods and services, but it will reflect in the form of increased prices as companies will factor in this as a permanent cost. One must remember that the decrease in the GST couldn’t provide much benefit to consumers as manufacturers later increased prices of their goods and services in most of the cases by insignificantly increasing the content quantity. So this effort of the government would not only slow down the formalization of the economy but also fuel the growth of the shadow (black) economy.

This policy shift is likely to cause more harm than good. The government should reconsider the matter and postpone the idea if it doesn’t want to entirely scrap it.

Rajeev Upadhyay

Widening Trade Deficit with Russia

For years, India had been maintaining the largest trade deficit with China, followed by the Middle East. But the geopolitical shifts in 2022 changed everything. Russia was not even in the top 10 countries with which India had a trade deficit. But since 2022, India has witnessed a historic and asymmetric expansion of its trade deficit with Russia, making Russia one of its most important trading partners. Before 2022, India’s trade deficit with Russia was under $5 billion, but it has now skyrocketed to a staggering $50.9 billion.

India’s rising trade deficit with Russia is widening despite the rupee-ruble payment mechanisms between the two countries with the purpose of broadening the bilateral trade relationship. But the rupee-ruble payment mechanism is not working. The reasons behind this are India’s massive trade deficit with Russia, volatile exchange rate and inconvertibility of the rupee, as well as fear of sanctions from the US. These make the rupee-ruble payment mechanisms almost ineffective, and often the two countries opt for alternate currencies like UAE Dirham (AED) for bilateral trade.

West Asia Conflict is Slowing Down Indian Economy

Indian economy is showing resilience and is expected to grow at 6.7%, but the ride is expected to be bumpy. It is caught in a problem for which it has no solution on its own. It is completely dependent on other parties.

The conflict in West Asia between the US and Iran has proved a double-edged sword for India. It is hurting India from two sides. India is facing energy challenges in terms of limited access to energy sources as well as high prices on one hand, which is turning the mathematics against the Indian economy as it induces inflation in the economy and increases current account deficit and rupee volatility. This is hurting demand in the economy. On the other hand, India's $50 billion in exports to the Middle East have almost come to a halt. This is pausing economic activities in India. Firms exporting to the Middle East are forced to pile up inventories as these firms are unable to ship their final products to their buyers despite long-term contracts. Their export consignments are caught and hanging in the balance in the firing zone between the US and Iran. This is resulting in slow manufacturing activities and lower labour demand. This has started the vicious circle.

New Tariffs by Trump in the Name of Forced Labour

A person consumed by spiteful rivalry often goes to great lengths to cause trouble for their rival, even if it means suffering a loss themselves. US President Donald Trump’s behaviour mirrors this mindset; in his zeal to 'fix' other nations, he repeatedly deals blows to the American economy.

India will certainly be adversely affected by the new tariff, as will other nations. However, it is ultimately the American citizens who are paying the price for Trump's love for tariffs. By the way, President Trump has populaized tariffs in a such a that now it does feel like an economic term even for a layman!

One wonders: is this merely the US President's spiteful rivalry at play, or is he, knowingly or unknowingly, becoming a Trojan horse for America in general and the American economy in particular?

Numbers don't Always Draw the Real Picture

Core sector output climbed to a five-month high of 5% in June. That's up from 3.2% in May and 1.1 percentage points higher than a year ago. Also, GDP growth is expected to be around 6.7% in the first quarter. But one may wonder whether everything is good on the economic front?

On the construction and public-works story, cement and electricity output each rose 9.8%, and iron ore, just added to the index, jumped a staggering 43.9%. But one must remember that the activities in these sectors don’t represent broad-based industrial revival. During the same period, crude oil output fell 4.2% in June, and natural gas production dropped 7.4%. The energy sector is under huge pressure. Activities in the energy sector actually tell you whether real economic activities such as manufacturing, transport, and consumption are picking up or not.

India is Fine Tuning its Export Strategy

India's export strategy and structure have undergone a significant shift following the imposition of tariffs by the US. As a result of the strategy to diversify exports into new markets, the share of shipments to countries outside Europe and NAFTA reached approximately 59% during April–May 2026. In the same period last year, the combined share of Europe and NAFTA stood at around 46%, down from 41% now. While a 5% shift might seem modest, it is far from insignificant; it reflects India's evolving priorities.

The disparity in India's export growth across different global regions reveals the true story. Exports to NAFTA grew by only 2.6% and to Europe by 4%, whereas shipments to ASEAN surged by 66.9%, Africa by 53.1%, North-East Asia by 30.7%, and South Asia by 40.2%. Double-digit growth was also recorded in exports to Latin America and Oceania. Together, ASEAN and Africa contributed an additional $7.6 billion in exports compared to the same period last year, playing a major role in overall growth.

Protection is not Helpful for Economies

Protection may be helpful for an economy in the short tem. But in long-term or permanent protection rarely does. Gita Gopinath's observation that tariffs made Americans pay more for inferior goods reminds me of a lesson India learnt the hard way before the 1991 reforms. For nearly four decades, India followed an import substitution strategy with high average tariff rates exceeding 87% by the late 1980s. The objective was to build domestic industries. The outcome was mixed. We created an industrial base, but we also created complacency. Consumers paid high prices for products that were often technologically outdated and of lower quality (we all remember the Ambassador car and years-long waiting lists for a telephone).

Tariffs reduce competitive pressure, create deadweight losses, and encourage X-inefficiency. Firms protected from global competition have fewer incentives to innovate, improve productivity, or upgrade quality. Consumer surplus falls while producer surplus rises, but society as a whole loses. That is exactly why India's manufacturing productivity accelerated only after the 1991 reforms, when tariffs were sharply reduced and competition increased.

India is Decreasing the Share of US Dollar in Its Treasury Holdings

The US dollar's share in India's treasury holdings had been steadily increasing till mid-2024. However, since the US imposed tariffs on India, India has been steadily reducing the share of the US dollar in its treasury holdings and increasing the share of precious metals instead in its holdings. The share of the US dollar in India's treasury holdings is now at its lowest level in the last six years. It was at $241 billion in October 2024, which fell to $190 billion in October 2025. By April 2026, the US dollar’s share in Indian treasury further fell to $181 billion.

This trend has gained momentum not only in India but globally. After the US imposed tariffs on its trade partners, countries around the world are seeking to reduce their dependence on the dollar. While it is true that there is currently no alternative to the US dollar, the world is looking for alternatives. This is why the share of local currencies in global bilateral trade is gradually increasing.

Restoration of Commercial LPG Supply is a Good News for Indian Economy

The government has resumed the supply of commercial LPG. This is positive news for the economy as well as the energy sector. Since the conflict between the US and Iran, and blockade of the Hormuz had completely shattered the energy supply chains for India. Many energy-importing economies, including India were hit hard as the availability and prices of gas as well as petroleum products had become to volatile.

With a deal between the US and Iran, maritime traffic in the Strait of Hormuz is now normalizing benefiting India to huge extent. This is expected to result in gas supplies gradually restoring to the normalcy. So this decision is not only the first step toward the normalization of the energy market will improve the availability of essential fuel for industries, commercial establishments, and the service sector, thereby supporting production and business activities.

It will take time before the prices of commercial gas starts easing if global supply conditions improves. So it will be premature commenting on significnat drop in the prices of the gas. Because the war between the US and Iran has resulted into huge structual challeneges with destruction and damages to the capacity of gas plants in the Middle East. So the capacity constraints and long-term supply contracts already locked in will continues to exert pressure on the prices. So, the gas supply will improve gradually.

Where is the Indian Rupee Moving?

Many are wondering, where is the Indian rupee moving?

The Indian rupee depreciated about 9% in the last one year. But post the US-Iran peace deal announcement, it has recovered about 1.5% in a matter of a few days!

So many are wondering, why has the rupee recovered?

Considering the inflation differential between economies, historical norms, Nominal Effective Exchange Rate (NEER), and Real Effectively Exchange Rate (REER), the Indian rupee is highly undervalued by 6-7% relative to its current market value.

REER is about 88 and NEER is 91 in the month of May 2026. These two values clearly indicate that the rupee is undervalued. Any value below 100 is considered as undervalued.

This undervaluation is not being caused by macroeconomic fundamentals. But it stems from the risk-off sentiments and equity market outflows. This is driving the rupee’s nominal spot rate down.