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 not 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