Economist Ajit Ranade has strongly contended that the assertion of a Merchant Discount Rate (MDR) on UPI transactions not impacting consumers is flawed reasoning. His remarks come after Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, which empowers the government to allow banks to levy MDR on UPI transactions.
While Finance Minister Nirmala Sitharaman clarified that consumers and person-to-person (P2P) transfers would remain free, Ranade, writing in Mint, highlighted UPI's role as essential digital public infrastructure in India. In July alone, UPI processed nearly 24 billion transactions, amounting to almost ₹30 trillion.
MDR Costs Will Transfer to Consumers
Ranade argued that despite assurances, consumers would not be immune to an MDR. "That MDR will be paid by the merchant and will not affect consumers is incorrect logic. It can either be absorbed or passed on through higher prices," he stated.
He emphasized that a significant majority—over 85%—of person-to-merchant transactions are small-ticket payments, like buying tea or paying an auto driver. For these micro-transactions, the absence of a transaction cost (zero MDR) was crucial for UPI's widespread adoption, making digital payments as seamless as cash.
The High Cost of UPI and Funding Solutions
Acknowledging the substantial operational costs of UPI, estimated by the industry at around ₹20,000 crore annually for banks, payment service providers, and NPCI (National Payments Corporation of India), Ranade noted that government reimbursement covers only a fraction. He agreed that these costs cannot be ignored and that payment entities should not be expected to subsidize UPI indefinitely.
However, Ranade differentiated between cost and price, suggesting that public infrastructure, despite being expensive, doesn't always need to charge users at every point of use due to its broader societal benefits. He proposed that the government could cover UPI's costs through other mechanisms.
RBI Dividend as a Funding Source
One such mechanism, Ranade suggested, is utilizing the Reserve Bank of India's (RBI) dividend to the Centre. The RBI's dividend in 2025-26 was ₹2.86 trillion, making the annual cost of UPI approximately 7% of this amount. He advocated for a transparent reimbursement system, tied to audited costs and efficiency standards, to compensate banks and payment providers without burdening merchants.
Wider Societal Benefits of UPI
Ranade also pointed out the extensive benefits of digital payments beyond mere transactions. Increased UPI usage can spur better telecom connectivity, boost digital literacy, and encourage business formalization, leading to clearer transaction trails for tax compliance. He drew parallels with Aadhaar authentication, which remains free due to its immense social benefits derived from ubiquity and low friction.
Furthermore, he advised considering the hidden costs of a cash-based economy, including printing, transportation, storage, security, and the maintenance of ATMs and bank branches, when evaluating payment systems.
Government Reiterates Consumer Protection
In the Rajya Sabha, Minister Sitharaman reiterated that the amendment is merely an enabling provision and does not immediately impose any tax or charge on UPI users. She clarified that the UPI and Services Steering Committee, led by NPCI, would deliberate on the introduction, scope, and structure of any potential MDR. "No Merchant Discount Rate (MDR) framework has yet been finalised," she stated.
Sitharaman emphasized that UPI would remain free for consumers, particularly for the vast majority of low-value merchant transactions. Any future MDR, if implemented, would apply only to a limited category of merchant transactions exceeding a specified threshold.