Examine the implications of subsidies for digital payments on financial inclusion and fiscal health.

Since January 2020, Merchant Discount Rate (MDR) on BHIM-UPI and RuPay debit transactions has been zero, mandated through Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [1]. The State instead compensates banks through an incentive scheme — a design that has deepened inclusion but whose fiscal arithmetic is now strained.

Gains for financial inclusion

• Scale of adoption: digital transactions rose from 8,839 crore (FY22) to 18,737 crore (FY24) — a 46% CAGR, with UPI alone growing at 69% [2].
• Pro-poor targeting: the 0.15% incentive is paid only on P2M transactions up to ₹2,000, i.e. small merchants, keeping kirana shops and low-income users in the formal payments net at zero cost at the counter [3].
• Formalisation dividend: digital trails widen credit access; DFS has itself commissioned a Socio-Economic Impact Analysis of the scheme, released at Chintan Shivir 2026 [4].

Strains on fiscal health and the ecosystem

• Rising, open-ended outlay: ₹1,500 crore in FY25 rose to ₹2,000 crore this year [3][5], yet volumes have multiplied far faster — per-transaction support keeps shrinking.
• Hidden cost on banks: above ₹2,000, and for all large merchants, banks bear zero MDR and no incentive [3] — an unacknowledged levy that discourages investment in fraud control and grievance redress.
• Annual uncertainty: one-year Cabinet approvals make long-horizon infrastructure planning difficult; even after MDR begins, the Ministry concedes collections will not cover full system cost [5].

Balancing inclusion with sustainability

• Publish per-transaction cost data — RBI's Discussion Paper on Charges in Payment Systems (August 2022) sought public views but the numbers remain untested [6].
• Brazil's Pix charges firms only ~0.33% (versus 1.13% debit, 2.34% credit), staying free for individuals [7] — a small, permanent, transparent fee.

A subsidy is justified while adoption is being built, not in perpetuity. Converting it into a rule-based, multi-year formula for small merchants, with any fee kept low and barred from pass-through to consumers, would protect inclusion gains while restoring fiscal prudence — the balance digital public infrastructure ultimately requires.