Data Shows Cash Usage Quickening Even as Government Weighs MDR on UPI
2-minute summary
An analysis of Reserve Bank of India (RBI) and National Payments Corporation of India (NPCI) data indicates that while Unified Payments Interface (UPI) transactions continue to expand, the pace of growth in their transaction value has slowed down over recent years (moderating to around 18.7% in 2026-27 from triple-digit rates in 2021-22). Concurrently, the growth rate of 'cash with the public' has accelerated, reaching nearly 13% with the total volume touching ₹41.8 lakh crore. This trend coincides with the passage of the Taxation and Other Laws (Amendment) Bill, 2026, which enables the government to permit a Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions. Although the government has clarified that charges would primarily target high-value merchants rather than retail users, economists and policy analysts warn that merchants might pass costs onto consumers, potentially incentivising cash usage. Furthermore, simultaneous growth in cash and digital transactions reflects robust underlying economic expansion but also raises questions regarding price level mismeasurement and inflation undercounting.
Why it's in the news
The government passed the Taxation and Other Laws (Amendment) Bill, 2026, enabling the levy of a Merchant Discount Rate (MDR) on UPI and RuPay transactions. This policy move comes at a time when data reveals that cash circulation growth is quickening while UPI transaction value growth is moderating.
Background and context
Following demonetisation in 2016 and subsequent government pushes for a cashless economy, UPI saw exponential adoption, aided by a zero-MDR policy mandated under the Finance Act, 2019. Under zero-MDR, banks and payment service providers (PSPs) were barred from charging merchants for UPI and RuPay transactions, with the Ministry of Electronics and Information Technology (MeitY) providing budgetary subsidies to offset operational costs. However, payment industry stakeholders and the Reserve Bank of India have continually raised concerns over the long-term financial sustainability of payment infrastructure, cyber-resilience investments, and innovation under a zero-revenue model. The debate revolves around balancing commercial viability for fintechs/banks against maintaining frictionless, low-cost digital transactions for users.
Committees and reports
- Nandan Nilekani Committee on Deepening of Digital Payments — Recommended expanding digital acceptance infrastructure, reviewing interchange fees, and designing market-led pricing to sustain payment service providers.
- Ratan Watal Committee on Digital Payments — Advocated for the interoperability of payment systems and upgrading digital infrastructure while moving towards a less-cash society.
Government schemes
- Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions — Financial subvention provided to acquiring banks to compensate for the absence of MDR on small-value digital transactions.
Previous UPSC questions on this theme
- Prelims GS-1 2017 — Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)'? (a) Mobile wallets will not be necessary for online payments. (b) Digital currency will totally replace the physical currency in about two decades. (c) FDI inflows will drastically increase. (d) Direct transfer of subsidies to poor people will become very effective.
Mains practice: Despite the rapid proliferation of digital payment platforms like UPI, currency in circulation in India has shown persistent resilience. Analyse the structural reasons behind this dual trend.
India’s payments landscape has witnessed an unprecedented digital surge through the Unified Payments Interface (UPI). However, Reserve Bank of India (RBI) data shows that 'Cash with the Public' has simultaneously expanded, pointing to a 'less-cash' rather than a 'cashless' transition.
Structural reasons for the coexistence of high cash usage and digital growth:
• Transactional vs. Store-of-Value Demand: UPI dominates high-frequency, low-ticket daily retail transactions. Conversely, physical cash continues to serve as a preferred store of value and liquidity cushion, particularly during economic uncertainties.
• Informality and the Cash Economy: A significant proportion of India's workforce and MSME ecosystem operates within the informal sector. Cash offers anonymity, zero compliance overheads, and absence of tax footprints, preserving its transactional dominance in unorganised wholesale supply chains.
• Digital and Infrastructural Divide: Intermittent internet connectivity, low digital literacy, and apprehension over cyber fraud in tier-3/tier-4 towns and rural hinterlands sustain cash dependence.
• Precautionary Liquidity: High GDP growth increases overall economic output, naturally raising the nominal transaction demand for both physical and digital media of exchange.
• Pricing and Friction Concerns: Imposition or anticipation of Merchant Discount Rates (MDR) can cause smaller merchants to prefer cash to avoid transaction costs.
Conclusion:
To sustain digital momentum without hurting consumption, policy should focus on strengthening digital infrastructure security, maintaining tiered and non-disruptive MDR structures, and providing structural incentives for formalisation rather than relying solely on administrative mandates.
Prelims practice questions
Q1. In macroeconomic accounting and Reserve Bank of India data, 'Cash with the Public' is calculated as:
- Currency in Circulation minus Cash held by Banks
- Currency Notes issued by RBI minus Coins minted by Government
- Total Broad Money (M3) minus Reserve Money (M0)
- Total Currency in Circulation plus Demand Deposits in Banks
Answer: A. 'Cash with the Public' represents the actual currency circulating among citizens and businesses outside the formal banking system. It is calculated by deducting cash balances held by commercial and cooperative banks from the total Currency in Circulation (CIC).
Q2. With reference to the 'Merchant Discount Rate' (MDR), consider the following statements: 1. It is the cost paid by a merchant to a bank for accepting digital payments from customers. 2. In a Zero-MDR regime, the acquiring bank charges the consumer directly instead of the merchant. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: A. Statement 1 is correct: MDR is the rate/fee charged to a merchant by the acquiring bank for processing digital debit/credit card or UPI payments. Statement 2 is incorrect: Under a Zero-MDR regime, neither the merchant nor the consumer pays MDR; the processing cost is either absorbed by payment entities or reimbursed via government budgetary subsidies.
Q3. Which entity operates and manages the Unified Payments Interface (UPI) infrastructure in India?
- Unique Identification Authority of India (UIDAI)
- Indian Banks' Association (IBA)
- National Payments Corporation of India (NPCI)
- Reserve Bank of India (RBI)
Answer: C. The Unified Payments Interface (UPI) is developed and managed by the National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India under the Payment and Settlement Systems Act, 2007.
Revision flashcards
- What is Merchant Discount Rate (MDR)? The fee charged to a merchant by an acquiring bank/payment aggregator for facilitating digital payment transactions (such as cards or UPI).
- How is 'Cash with the Public' defined in RBI terminology? Total Currency in Circulation (CIC) minus cash reserves held within the vaults of the banking system.
- What was the Zero-MDR policy introduced under the Finance Act, 2019? A mandate prohibiting banks and payment service providers from levying MDR on transactions made via RuPay debit cards and BHIM-UPI.
- Which committee recommended a market-driven pricing mechanism for digital payments? The Nandan Nilekani Committee on Deepening of Digital Payments (2019).
- What is the primary argument against a permanent Zero-MDR regime? It limits revenues for acquiring banks and fintechs, hindering capital investment in cybersecurity, fraud prevention, server infrastructure, and onboarding of new merchants.