UPI's zero-MDR model is fiscally unsustainable. Discuss the case for and against introducing MDR.

Merchant Discount Rate (MDR) on RuPay debit cards and BHIM-UPI has been zero since January 2020, mandated through Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961, with banks compensated by a Cabinet-approved incentive scheme [2]. With MDR set to go live on 15 October, the cost question has reopened [1].

Case for introducing MDR

• Widening fiscal gap: digital transactions rose from 8,839 crore (FY22) to 18,737 crore (FY24) — 46% CAGR, UPI alone 69% [4] — while the outlay moved only from ₹1,500 crore (FY25) to ₹2,000 crore [1][3]. Volumes outpace the subsidy.
• Partial compensation: the 0.15% incentive applies only to small-merchant transactions up to ₹2,000; above that, and for all large merchants, banks earn nothing [3]. Zero MDR is not free — the cost merely shifts to banks and payment service providers.
• Under-investment risk: annual, one-year approvals discourage spending on fraud control and grievance redress [2].
• Regulatory logic: RBI's Discussion Paper on Charges in Payment Systems (August 2022) sought public views on cost-recovery pricing [7].

Case against introducing MDR

• Digital public infrastructure: ₹2,000 crore is a modest fiscal cost for a system carrying over 18,000 crore transactions [1][4].
• Inclusion setback: the scheme deliberately targeted small merchants [3]; a counter-level charge may push vegetable sellers and kirana shops back to cash.
• Enforcement gap: Section 10A binds banks, not shopkeepers [2], so the Ministry's plan to prevent pass-through via the IBA and CAIT rests on persuasion [1].
• Demonstrated gains: DFS's own socio-economic impact study affirms the scheme's benefits [5].

The real choice is not "free versus paid" but who is openly told they are paying. Brazil's Pix — free for individuals, about 0.33% for firms against 1.13% on debit cards — shows a small, permanent, published fee can coexist with mass adoption [8]. India should pair a formula-based subsidy for small merchants with transparent cost disclosure by RBI and a clear statutory amendment, keeping UPI both financially viable and inclusive.