Discuss the rationale behind reintroducing Merchant Discount Rate on UPI transactions. How does the tiered exemption structure balance fiscal sustainability with financial inclusion?

Merchant Discount Rate (MDR) is the fee a merchant pays banks and payment apps for processing a digital payment. NPCI's 0.4% MDR on person-to-merchant (P2M) UPI payments above ₹2,000, effective 15 October 2026, ends a blanket zero-MDR regime and seeks commercial sustainability without abandoning inclusion.

Rationale for reintroduction

• Cost recovery for the ecosystem: UPI's servers, fraud controls, grievance handling and settlement costs were borne by banks and third-party apps under zero MDR, with no user-side revenue [1].
• Fiscal sustainability: the substitute was budgetary — a ₹1,500 crore Cabinet-approved incentive scheme paying 0.15% on low-value BHIM-UPI (P2M) transactions [3]. A permanent public utility funded by an annually renewed grant is inherently fragile.
• Regulatory principle: RBI's Discussion Paper on Charges in Payment Systems (2022) held that payment charges should be reasonable and competitively determined while giving intermediaries an optimal revenue stream [4].
• Calibration: at 0.4%, UPI MDR stays well below credit card MDR (1.5–2.5%) and the debit card cap (0.90%) [2].

How the tiered structure balances the two goals

• Inclusion preserved at the base: all P2P transfers remain free irrespective of amount; P2M payments up to ₹2,000 are free; small merchants under the P2PM category, including street vendors receiving up to ₹1 lakh monthly via QR, pay zero MDR on every transaction [1].
• Revenue drawn from the top: only higher-value payments to larger merchants are charged, with a ₹300 cap above ₹75,000 preventing regressive burdens on big-ticket sales [2].
• Net effect: roughly 96% of merchant transactions stay unaffected [1] — revenue is sourced where capacity to pay is greatest.

The design is defensible, but the burden concentrates on mid-sized, thin-margin retailers whose bills routinely cross ₹2,000, and a no-pass-through rule can curb only visible surcharges, not repricing or cash discounts [1]. Publishing the split of MDR between banks and apps, and tracking whether transactions cluster below ₹2,000, would uphold RBI's transparency standard [4] and keep UPI's digital public infrastructure both self-sustaining and universally accessible.