Prasanna Tantri, an Associate Professor of Finance at the Indian School of Business (ISB), has voiced strong opposition to the Indian government's newly introduced UPI charges. Tantri contends that these charges represent a withdrawal of crucial support from what he describes as a "world-class Indian innovation" and are inconsistent with effective industrial policy.
The Argument Against New UPI Charges
According to Tantri, the Unified Payments Interface (UPI) generates significant benefits that extend far beyond its direct users. He argues that an infrastructure with such broad positive spillovers should continue to receive government backing, rather than face new fees.
"Effective industrial policy has a legitimate place for subsidising activities that generate exceptionally large positive spillovers for the wider economy," Tantri stated. He added, "Unfortunately, we appear to use the term 'industrial policy' without understanding what made successful versions work."
The finance professor drew a parallel between the new UPI charges and India's past exchange-rate policy, where an overvalued rupee reportedly hampered exports. He suggests that, similarly, the new MDR charges partly withdraw support from UPI, potentially hindering its widespread adoption and benefits.
Impact on Digital Payments
Tantri praised UPI as an innovation that significantly lowers transaction costs, formalizes commerce, and provides extensive benefits beyond individual users. He emphasized that any coherent industrial policy would prioritize continued support for such an infrastructure, given its extraordinary benefit-to-cost ratio.
Details of the New UPI Fee Structure
The government's new policy, effective October 15, introduces a 0.4 percent Merchant Discount Rate (MDR) on UPI payments exceeding ₹2,000 made to merchants. This fee is capped at ₹300 for transactions of ₹75,000 and above. This move marks the end of the zero-MDR regime, which had been in place since January 2020 to encourage digital payment adoption, despite criticism from banks and fintech firms regarding its sustainability.
Specific sectors will also see new charges:
- Essential services like railways, telecom, and fuel will incur a flat ₹5 fee per transaction.
- Capital markets will attract a lower rate of 0.02 percent.
The Finance Ministry clarified that the new framework will not affect person-to-person (P2P) transactions, which will remain free regardless of the amount. Additionally, merchant payments up to ₹2,000 and transactions under the zero-MDR framework for small merchants will also remain free. The ministry estimates that approximately 96 percent of all person-to-merchant (P2M) transactions will continue to be unaffected by the new MDR.