Critically evaluate the zero-MDR policy on UPI transactions introduced in 2020. Has it served its intended purpose of promoting a less-cash economy?

Zero MDR — the waiver of the merchant's fee on RuPay debit card and BHIM-UPI payments, effected from January 2020 through amendments to Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [1] — sought a less-cash economy. It largely delivered adoption, but not a self-sustaining payments ecosystem.

Merits: adoption and inclusion

• Zero acceptance cost removed the entry barrier for small and street vendors, making QR acceptance near-universal; UPI has since become India's dominant retail rail, with sustained double-digit growth in volume and value [4].
• Statutory backing: Section 269SU obliged large businesses to offer prescribed digital modes without charge, converting persuasion into mandate [1].
• Acted on the Standing Committee on Finance's recommendation to rationalise digital transaction costs and incentivise lower-value transactions [5].
• Deepened financial inclusion by linking small merchants and low-income users to formal payment channels at no cost.

Limitations: a cost with no payer

• Banks and payment service providers bear servers, fraud checks, settlement and grievance redress without merchant revenue. RBI's Discussion Paper on Charges in Payment Systems stressed that payment systems must be reasonably priced and cost-recovering to remain sustainable [3].
• The government incentive substituted for MDR only partially — ₹1,500 crore for FY 2024-25, at 0.15% on small-merchant P2M transactions up to ₹2,000 and nothing above [1]. This is budget-dependent and creates a cliff, not a market mechanism.
• A loss-making rail weakens incentives to invest in fraud prevention and outage resilience.
• Cash was not displaced as a store of value: RBI's Benchmarking India's Payment Systems notes India's currency-in-circulation-to-GDP ratio is high though per-capita CIC is low, and that CIC is a sub-optimal indicator of cash payments since high-value notes are hoarded [2].

Zero MDR thus succeeded in its behavioural goal while under-providing for its economics — adoption was purchased, not priced. A calibrated shift to tiered, turnover-linked pricing that keeps small-value payments free, coupled with judging success by P2M transaction growth rather than currency in circulation [2], would preserve inclusion while making the less-cash economy financially durable.