"Zero-MDR UPI built India's digital-payments revolution but is fiscally unsustainable." Critically examine with reference to the recent levy of MDR on P2M transactions.

The Merchant Discount Rate (MDR) is the fee a merchant, not the customer, pays for accepting a digital payment. Since January 2020, UPI has carried zero MDR under amendments to the Payment and Settlement Systems Act [2]. NPCI has now defended a 0.4% MDR on P2M payments before the Supreme Court, arguing that zero MDR is "no longer sustainable" [1]. The statement is largely valid, but the levy needs safeguards.

Zero MDR as the catalyst of the revolution

• Costless acceptance: kirana stores and street vendors could go digital without losing any margin.
• Unmatched scale: about 241.62 billion transactions worth ₹314 lakh crore in FY 2025-26, and a record 24.51 billion in August 2026 (about 791 million a day) [1].
• Targeted subsidy: a 0.15% incentive paid on BHIM-UPI P2M payments up to ₹2,000 to small merchants kept the system free for them [2].

Why it is fiscally unsustainable

• Exchequer burden: without a fee, running costs fall on the budget through incentive schemes, and those costs rise with volume [1][2].
• Resilience costs: growth places "greater demands on the security, resilience and infrastructural capacity" of the system [1], and cybersecurity, fraud control and uptime need recurring funding.
• Narrow levy: NPCI says only about 4% of merchant transactions are affected [1], so the cost moves from taxpayers to large merchants who can bear it (user-pays model).

Concerns with the levy

• Inclusion risk: merchants may push customers back to cash or pass costs on through higher prices.
• Legal ambiguity: it is unclear whether the MDR is a commercial fee or a levy. The SC must also weigh judicial deference to economic policy [1].
• Policy credibility: reversing a long-standing "free UPI" stance unsettles the expectations of merchants and fintechs.
• DPI precedent: other public digital rails, such as the wider India Stack, may face similar demands to recover costs.

Zero MDR worked as a launch subsidy, but a system handling nearly 800 million transactions a day needs revenue of its own. A tiered, transparent model would keep P2P and small-merchant payments free, charge large merchants modestly, and earmark the revenue for security. That would keep UPI an inclusive public good, in line with SDG 8.10 on universal access to financial services.