UPI's zero-MDR regime has been called both a driver of financial inclusion and a source of fiscal unsustainability. Critically analyse.

Merchant Discount Rate (MDR) is the fee a merchant pays for processing a digital payment. Since 2020, Section 10A of the Payment and Settlement Systems Act, 2007 has barred any such charge on UPI and RuPay debit transactions [1]. The debate is therefore not about UPI's value, but about who finances a free public rail.

Zero-MDR as an inclusion driver

• Zero entry cost removed the single biggest barrier to acceptance for small and informal merchants, unlike card networks where MDR deterred adoption.
• Digital payment volumes rose from 8,839 crore transactions in FY 2021-22 to 18,737 crore in FY 2023-24 — a 46% jump [5].
• The Department of Financial Services' own impact assessment ties the incentive-backed zero-MDR model to grassroots merchant onboarding [6].
• It preserves UPI as Digital Public Infrastructure — a utility priced for reach, not for revenue.

The sustainability critique

• Switching, settlement and fraud-control costs fall on banks and NPCI, reimbursed only partly: the Cabinet-approved incentive scheme covered P2M transactions up to ₹2,000 with an outlay of ₹1,500 crore for FY 2024-25 [2].
• Parliament's Standing Committee on Finance has flagged the ecosystem as financially unsustainable and sought a viable revenue mechanism [3].
• Perpetual budgetary dependence risks underinvestment in resilience and grievance redress as volumes multiply.

A calibrated judgment

• The problem is one of cost allocation, not absolute affordability: the RBI transferred a record ₹2.86 lakh crore surplus to the Centre for FY 2025-26 [4], against which UPI's running cost is marginal.
• Replacing a statutory bar with executive notification power adds flexibility but reduces predictability for users.
• A tiered design — MDR on large merchants, continued exemption for small ones — reconciles both claims.

Zero-MDR delivered inclusion at scale; its financing model, not its principle, is what has aged. A transparent, tiered cost-recovery framework backed by assured public funding can sustain UPI without pricing out the small merchant, keeping digital payments a genuine instrument of inclusive growth.