Don’t Let Monetisation Undo UPI’s Inclusion Gains: Lekha Chakraborty

Award-winning economist Dr Lekha S Chakraborty, who is also Professor and Chair at the National Institute of Public Finance and Policy, speaks to Open about the new Taxation and Other Laws (Amendment) Bill, which proposes a fee on UPI transactions, fears among wealth-management businesses, the next phase of digital payments, the United States’ stand on instant payment systems in India and Brazil, and more. Chakraborty, who is a Governing Board Member of the International Institute of Public Finance and Policy, Munich, says, “Transparent thresholds, strong protections for small merchants, and continued zero charges for consumers constitute one path that maintains the public-good character of the system.” An alumna of Delhi’s Jawaharlal Nehru University, her books include ‘Fiscal Policy for Sustainable Development in Asia Pacific: Gender Budgeting in India’ and ‘Fiscal Consolidation, Budget Deficits, and Macroeconomics’. Edited excerpts:

What are your thoughts on the Trump administration’s logic behind treating free UPI (Unified Payments Interface) transactions in India as well as the Pix instant payment system in Brazil as unfair trade practices? Isn’t that stance unfair to India?

The United States’ characterisation of free UPI and Pix transactions as unfair trade practices under Section 301 rests on a commercial rather than a developmental lens.

Official documents point to zero or capped merchant fees, free individual transfers, mandatory participation by large banks, and prominent placement in banking apps as features that disadvantage US card networks.

UPI and Pix were conceived as public digital infrastructure precisely to overcome the constraints of cash-heavy economies with limited card penetration. Their low-cost architecture was intentional: it removed barriers for both users and merchants and delivered rapid inclusion and formalisation. Treating these outcomes as trade distortions elevates the fee-based model of legacy networks above the measurable public benefits the systems have produced.

India’s decision to build interoperable, low-cost rails constitutes a legitimate exercise of policy sovereignty. Labelling it unfair expands the notion of trade distortion in ways that could discourage other emerging economies from investing in similar infrastructure.

Card networks rely primarily on merchant fees and interchange. Real-time account-to-account systems reduce reliance on that layer. When they achieve scale, they compress the market for higher-fee products. This is competition on efficiency and outcomes, not discrimination. The appropriate response is product and cost adjustment by incumbents, not the reclassification of successful public systems as unfair practices.

The Union Finance Ministry has introduced a Bill in Parliament to allow banks and payment system providers to charge fees for UPI and RuPay debit card payments, titled the Taxation and Other Laws (Amendment) Bill, proposing changes to the Payment and Settlement Systems Act of 2007. What do you think this means for the end consumer who has chosen to use UPI for petrol purchases and other essential payments?

The Taxation and Other Laws (Amendment) Bill is enabling legislation, not an immediate imposition of charges. It replaces a fixed statutory reference to specific electronic modes under the Income-tax Act with authority for the government to notify which modes remain protected from fees.

Finance Minister Sitharaman has been explicit that consumers will continue to face zero charges on UPI, person-to-person transfers will remain free, and any future merchant discount rate will be limited, nominal and applied only above defined thresholds, with small merchants and street vendors excluded.

For the ordinary user paying for fuel or other essentials, the near-term effect is therefore zero. The material risk resides in the subsequent use of the notification power. Even selective merchant fees could generate some pass-through into retail prices, despite the stated intention to preserve the consumer experience.

The shift from rigid statutory protection to administrative flexibility introduces both opportunity and risk. Flexibility can support the long-term financial sustainability of the system, or it can gradually broaden the incidence of charges.

Credibility now hinges on whether future notifications remain narrow, transparent and consistent with the repeated political commitment to protect consumers and small merchants.

I see this move as a capitulation on a promise that the government had made when people in large numbers chose UPI over cash. Do you share that sentiment?

A distinction must be drawn between form and substance. The creation of legal flexibility to modify the zero-MDR (merchant discount rate) regime, particularly under external pressure, marks a departure from the earlier rigid commitment that underpinned mass adoption. At the same time, the repeated, high-level assurances that consumers and small merchants will remain shielded indicate that the core promise has not yet been breached in practice.

Whether that promise endures will depend on the scope of future notifications and on sustained public and parliamentary oversight.

Zero-MDR was never costless. Banks and payment service providers absorbed the expenses of processing, fraud management and customer support. The policy choice rested on the judgment that the social returns – greater inclusion, formalisation and reduced cash intensity – outweighed private costs. With monthly transaction volumes now measured in the tens of billions, questions of durable funding are legitimate. The central issue is not whether sustainability should be addressed, but how. Transparent, limited merchant fees above clear thresholds, paired with robust safeguards for small merchants and consumers, can preserve the public-good character of the system. Open-ended monetisation cannot.

Don’t you see this governmental decision affecting various segments, especially the wealth-management business, since this will result in higher operating costs and squeeze already thin profit margins?

An increase in operating costs within the payments layer would affect segments such as wealth management, though the impact would be secondary rather than existential. Zero-MDR has effectively treated UPI as near-free public infrastructure. Even limited merchant fees would raise the cost base for banks and apps that currently absorb those expenses.

Wealth managers, brokers and platforms that rely on frequent small-value transfers or systematic investment plans could experience incremental friction or cost pass-through. Institutions with scale are better positioned to absorb the change; thinner-margin or smaller players would feel it more acutely. The speed and convenience advantages of UPI would remain, but the underlying economics of the rail would become less subsidised.

Most wealth-management flows already pass through intermediaries capable of absorbing modest increases or selectively passing them on. The larger question is whether the payments layer continues to function as a low-friction utility or evolves into an additional cost centre that influences product design and pricing. Systems that begin as pure public goods rarely remain entirely free once they attain systemic scale. The policy challenge is to manage the transition without eroding the inclusion gains that originally justified the approach.

Google Pay and PhonePe together hold close to 79% of the UPI market share. Wouldn’t this mean that such players stand to gain from this measure, which also benefits companies such as Visa and Mastercard?

Market concentration is material. Google Pay and PhonePe together account for roughly 79 per cent of UPI transaction volume on the NPCI rail. Should limited merchant fees be introduced, the platforms already handling the bulk of the volume are best positioned to capture a share of those revenues, thereby improving unit economics on a service that has been loss-making or heavily subsidised.

Visa and Mastercard stand to gain more structurally. Any softening of pure zero-cost advantages would slow the further displacement of cards and reinforce the relative position of fee-based models.

This does not imply that the change constitutes a pure transfer to foreign firms. Domestic banks, NPCI and smaller apps also have legitimate interests in sustainable economics. Nevertheless, the combination of high concentration among a few large apps and external pressure aligned with card-network interests means the largest players are well placed to benefit from any monetisation.

Concentration itself is a longer-standing policy concern. Measures to foster greater competition among apps and to strengthen the domestic public layer remain relevant irrespective of the eventual fee structure.

How do we ensure that instant payment systems stay inclusive?

Instant payment systems have become integral instruments for financial inclusion and economic formalisation. When they succeed at scale, they inevitably challenge the economics of incumbent networks. The appropriate response is not to treat low-cost public infrastructure as a trade violation, but to permit countries to design rails that match their development priorities while securing long-term operational sustainability.

Clear and credible commitments to protect consumers, underpinned by transparent rule-making, will determine whether the next phase of digital payments remains inclusive. Systems that generate substantial positive externalities require deliberate decisions about cost-bearing and the constraints that govern it. External commercial pressure may accelerate those decisions; it should not dictate their content.

Economies that have invested in interoperable, low-cost rails have extended access to hundreds of millions of users. Preserving those gains while establishing durable funding models is the central policy task. Transparent thresholds, strong protections for small merchants and continued zero charges for consumers constitute one path that maintains the public-good character of the system. Open-ended monetisation risks undoing the very inclusion benefits that made these systems valuable.