Discuss the significance of UPI's zero-MDR policy in advancing financial inclusion in India. Critically examine the implications of reversing this policy through the Payment and Settlement Systems (Amendment), 2026.

Since January 2020, Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act mandated zero Merchant Discount Rate (MDR) on BHIM-UPI and RuPay [1]. Treating the payment rail as a public good, this subsidy drove mass adoption; the 2026 amendment now reopens the question of who pays for it.

Significance for financial inclusion

• Universal access: UPI had onboarded about 55.49 crore users by June 2026 [2], and in a decade became the world's largest real-time payments platform [3].
• Zero cost of acceptance: street vendors and kirana shops adopted QR codes because no fee was deducted; a ₹1,500 crore incentive scheme (FY 2024-25) compensated acquirers for low-value P2M transactions up to ₹2,000 [1].
• Formalisation: digital trails support cash-flow-based lending, complementing the JAM trinity.
• Predictability: a statutory bar on charges gave users and merchants durable assurance of free payments [1].

Critical examination of the reversal Merits

• Zero MDR left banks and payment providers bearing infrastructure and fraud-management costs without revenue, sustained only by budgetary incentives — fiscally unsustainable at UPI's scale [1].
• The amendment is an enabling provision, empowering the Centre to notify which modes stay charge-free rather than imposing any charge [4]; any levy is expected to be confined to larger merchants above a threshold.

Concerns

• Delegated legislation: certainty guaranteed by Parliament is converted into executive notification [4], diluting legislative oversight.
• Policy credibility: reversing a decade-old commitment may deter future adoption built on similar assurances.
• High-value payments, though a small share of volume, carry the bulk of transaction value — any levy there could push merchants toward cash.
• Public sensitivity is high, as the episode of false claims of GST on UPI payments above ₹2,000 showed [5].

A calibrated, transparent MDR — exempting consumers, P2P and small merchants, with rates fixed after consultation — can fund the rail without eroding inclusion. Cost recovery and the constitutional goal of an inclusive digital economy must advance together.