Discuss the fiscal sustainability challenges of India's zero-MDR UPI policy and evaluate the case for a tiered Merchant Discount Rate.

Since January 2020, UPI has operated at zero Merchant Discount Rate, making the exchequer the ecosystem's paymaster. With volumes crossing 24,162 crore transactions in FY 2025-26 [1], a calibrated tiered MDR is now fiscally defensible — provided its design protects small merchants.

Fiscal sustainability challenges

• Subsidy, not revenue: zero-MDR rests on statutory backing (Section 10A, Payment and Settlement Systems Act, 2007; Section 269SU, Income-tax Act) [2], so servers, bandwidth and fraud control are funded by budgetary incentives rather than by users.
• Small and capped support: the incentive scheme carried an outlay of ₹1,500 crore and pays only 0.15% on P2M payments up to ₹2,000 for small merchants [2]; higher-value payments earn nothing, leaving banks and payment service providers to absorb the residual cost.
• Annual grant risk: being a yearly Cabinet-approved outlay [2], it must be re-sanctioned each Budget — a weak base for long-horizon investment.
• Oversight warning: the Standing Committee on Finance cautioned that delay in a tiered revenue model could squeeze payment firms' cybersecurity capacity [3].

The case for a tiered MDR

• Self-reliance: the Committee asked DFS to "concurrently explore a self-reliant, tiered revenue model" alongside the multi-year scheme for Tier 3–6 cities [3].
• Quality has a cost: the scheme's own conditions — 99.5% uptime, technical declines below 0.75% [2] — show that reliability needs earned, predictable revenue.
• Protective by design: a threshold-based fee spares low-value transactions, preserving inclusion at the base.

Limits of the case

• Incidence: MDR falls on merchants; thin-margin, high-ticket sellers may raise prices or steer customers to cash, working against the same inclusion goal [3].
• Frozen threshold: a rupee cut-off not indexed to prices will progressively capture ordinary purchases.

The fiscal logic for a tiered MDR is sound; the risk lies in threshold design, not in the principle. A transparent annual statement of UPI's running cost, incentives paid and shortfall, plus periodic review of the threshold, would let Parliament judge the trade-off on evidence — sustaining Digital Public Infrastructure without diluting financial inclusion.