MDR on UPI has become a household topic, polarising India. Some claim MDR is beneficial, while others express dissatisfaction. Many are asking how long UPI will remain free. Charges are natural. Others are asking when other freebies will be stopped. Every side has some fair points. MDR on UPI, like any decision, does have some benefits for the economy. But on the other side, it will also negatively affect people and the economy.
MDR on UPI does have some positive impacts on the economy. It will make the UPI ecosystem sustainable and competitive in the medium to long term. The annual cost of operating, scaling and maintaining UPI infrastructure is about INR 20,000 crores. Not only this, the business was not profitable for operators, so the businesses were not investing much in cybersecurity, innovation and system upgrades. MDR on UPI will make the business competitive, and more investment will flow into cybersecurity, innovation and system upgrades. This will also help in improving UPI infrastructure in rural areas. So on these counts, the MDR on UPI is beneficial.
It should be noted that UPI cannot be treated as a freebie. Rather, it is an economic enabler which is helping in creating an ecosystem that revolves around the digital economy. This costly free economy is a 'positive discrimination' which is helping increase financial inclusion and formalise the economy. Once, on 15th October, this MDR on UPI becomes a reality, it will have many negative consequences for the economy. It will lead to increased use of cash, indirect inflation and a pushback for growth-stage small retailers.
It is significant that merchant payments account for roughly two-thirds of the total transaction value processed via UPI in India. This means that while the 0.4% charge won't apply to that 67% share, it will apply to a substantial portion, and merchants and most probably manufacturers will ultimately pass this cost on to consumers by increasing the margins for the sellers. The implication is clear: prices of all goods, mainly in the FMCG sector, will rise, potentially by several percentage points.
Recall that when the government reduced GST rates, consumers did not actually reap much benefit. At least in the FMCG sector, consumers clearly didn't. Companies quietly raised pre-tax prices by making marginal adjustments to product quantities while continuing to sell goods at the same old price points.
It is worth noting that these price hikes will occur at a time when the economy is already grappling with inflation. This impact will be reflected in the inflation figures for November. The US Federal Reserve has already exerted pressure on the rupee and inflation by raising interest rates; consequently, the Reserve Bank's Monetary Policy Committee (MPC) will be compelled to raise domestic interest rates during its October meeting.
It is still unclear what plans the government has to address the negative effects of MDR on UPI. But MDR on UPI is going to negatively affect a large number of small merchants if they continue accepting payment through UPI. This may lead to a large number of merchants slowly stopping accepting payments through UPI or asking for split payments.
Imposing MDR on UPI is not wrong. If not today, one day it was destined to happen. But the timing is not appropriate.
MDR on UPI does have some positive impacts on the economy. It will make the UPI ecosystem sustainable and competitive in the medium to long term. The annual cost of operating, scaling and maintaining UPI infrastructure is about INR 20,000 crores. Not only this, the business was not profitable for operators, so the businesses were not investing much in cybersecurity, innovation and system upgrades. MDR on UPI will make the business competitive, and more investment will flow into cybersecurity, innovation and system upgrades. This will also help in improving UPI infrastructure in rural areas. So on these counts, the MDR on UPI is beneficial.
It should be noted that UPI cannot be treated as a freebie. Rather, it is an economic enabler which is helping in creating an ecosystem that revolves around the digital economy. This costly free economy is a 'positive discrimination' which is helping increase financial inclusion and formalise the economy. Once, on 15th October, this MDR on UPI becomes a reality, it will have many negative consequences for the economy. It will lead to increased use of cash, indirect inflation and a pushback for growth-stage small retailers.
It is significant that merchant payments account for roughly two-thirds of the total transaction value processed via UPI in India. This means that while the 0.4% charge won't apply to that 67% share, it will apply to a substantial portion, and merchants and most probably manufacturers will ultimately pass this cost on to consumers by increasing the margins for the sellers. The implication is clear: prices of all goods, mainly in the FMCG sector, will rise, potentially by several percentage points.
Recall that when the government reduced GST rates, consumers did not actually reap much benefit. At least in the FMCG sector, consumers clearly didn't. Companies quietly raised pre-tax prices by making marginal adjustments to product quantities while continuing to sell goods at the same old price points.
It is worth noting that these price hikes will occur at a time when the economy is already grappling with inflation. This impact will be reflected in the inflation figures for November. The US Federal Reserve has already exerted pressure on the rupee and inflation by raising interest rates; consequently, the Reserve Bank's Monetary Policy Committee (MPC) will be compelled to raise domestic interest rates during its October meeting.
It is still unclear what plans the government has to address the negative effects of MDR on UPI. But MDR on UPI is going to negatively affect a large number of small merchants if they continue accepting payment through UPI. This may lead to a large number of merchants slowly stopping accepting payments through UPI or asking for split payments.
Imposing MDR on UPI is not wrong. If not today, one day it was destined to happen. But the timing is not appropriate.
Rajeev Upadhyay
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