NITI Aayog: Digital payments must be self-sustaining, says Ashok Kumar Lahiri

⚡ Key Financial Takeaways

NITI Aayog Vice Chairman Ashok Kumar Lahiri stated that the expectation of free digital payment services is incorrect and the industry must be self-sustainable.

A 0.4% Merchant Discount Rate (MDR) will apply to UPI person-to-merchant (P2M) transactions over Rs 2,000 starting October 15.

The MDR is capped at Rs 300 for transactions of Rs 75,000 and above.

Approximately 96% of P2M transactions are expected to remain unaffected by the new charges.

Lahiri argued that the small charge will not significantly impact merchant behavior, comparing it to standard bank fees.

💡 Why It Matters

This policy shift marks a significant transition in India's digital payment strategy from a subsidy-driven growth model to a commercially sustainable one. By introducing MDRs on high-value transactions, the government aims to ensure the long-term viability of the UPI infrastructure while minimizing disruption to the majority of small-value transactions that form the backbone of digital adoption in India.

Digital Payments Must Move Beyond Subsidies

NITI Aayog Vice Chairman Ashok Kumar Lahiri has emphasized that India's digital payments ecosystem needs to achieve financial self-sustainability. Speaking to Moneycontrol on September 16, Lahiri stated that the expectation for goods and services to be provided free of cost is not viable for the long term.

"Business has to be self-sustainable. I mean, this expectation that services and goods will be free is not correct," Lahiri said. He noted that while the government has played a significant role in promoting digital adoption, the model cannot rely indefinitely on subsidies.

New MDR Framework Details

Lahiri's remarks come one day after the government announced a new Merchant Discount Rate (MDR) structure for Unified Payments Interface (UPI) transactions. Effective October 15, a 0.4% MDR will be applicable to person-to-merchant (P2M) transactions exceeding Rs 2,000.

To limit the impact on high-value payments, the charge is capped at Rs 300 for transactions of Rs 75,000 and above. Specific sectors, including railways, telecom, insurance, fuel, and agricultural inputs, will face a flat Rs 5 MDR on transactions over Rs 2,000. Mutual funds, securities, stockbrokers, and dealers will attract a lower MDR of 0.02%, also capped at Rs 300.

The government has clarified that consumers will not bear this cost. Person-to-person (P2P) transactions, P2M transactions up to Rs 2,000, and payments to small merchants under the existing zero-MDR framework will remain free. Officials estimate that around 96% of P2M transactions will remain unaffected by the new charges.

Impact on Merchants

Concerns have been raised regarding the potential impact on small merchants, such as kirana stores. However, Lahiri dismissed the idea that the fee would alter merchant behavior.

"Just because there is a 40-paise charge on every Rs 100 transaction, do you really think a kirana store owner will stop accepting UPI and ask customers to pay in cash? It is such a small amount that you won’t even feel it," he said.

He compared the MDR to other standard banking charges, such as fees for chequebooks, arguing that merchants and users would quickly become accustomed to the cost. "You’ll get used to it... It’s part of the business," Lahiri added.

Distribution of Charges

Lahiri clarified that the MDR is not a tax or a revenue collection for the government or the National Payments Corporation of India (NPCI). Instead, the charges will be distributed among the various participants in the payment ecosystem to help sustain the infrastructure. He stressed that the objective is to find ways to keep the digital payments system running without perpetual government subsidy.

🏛️ Background & Context

The introduction of MDRs follows years of zero-cost UPI transactions, which were heavily subsidized to encourage digital adoption. The new framework differentiates between small-value transactions, which remain free to protect small merchants and consumers, and high-value transactions, where a small fee is deemed acceptable to cover infrastructure costs.

👁️ What To Watch Next

Readers should watch for the implementation of the new MDR structure starting October 15. Market reactions from major merchants, particularly in sectors like fuel and insurance, and any potential adjustments in consumer spending behavior on high-value UPI transactions will be key indicators of the policy's impact.