Ministry of Finance Recommends Using Producer Price Index Instead of Wholesale Indices in State Contracts

The Ministry of Finance informed the Parliamentary Committee on Finance that the Department of Financial Services is studying two possible solutions to ease the financial burden associated with the Unified Payments Interface (UPI).

These options include either resuming the Merchant Discount Rate (MDR) for certain high-threshold transactions or merchants, or implementing a multi-tiered incentive structure that would allow for a gradual phasing out of government support over the next few years.

In response to the committee's query from July 17, the department stated that both approaches are being examined due to the need to ensure the sustainability of the UPI ecosystem and the load on the public exchequer.

Parliamentary Committee Findings

In its report presented on Wednesday, the parliamentary committee noted that the budgetary allocation for stimulating UPI transactions and compensating for losses from zero MDR amounted to 200 billion rupees. Meanwhile, the estimated operational costs of the industry are assessed at 20,700 crore rupees.

The committee, chaired by Lok Sabha member Mahadev Bhartruhari Mahtab, emphasized that although the legislative provision for applying calibrated MDR on high-value transactions exists, any delay in notifying and launching this system forces payment service providers to heavily rely on insufficient subsidies. This, in turn, jeopardizes critical investments in cybersecurity, fraud prevention, and network infrastructure.

Earlier, in January 2020, the Centre introduced zero MDR for all UPI transactions to accelerate the adoption of digital payments and encourage the shift from cash to digital transactions.

The committee also reported that UPI is expected to process up to 150 billion transactions monthly and attract 600 million new users. However, according to the report, current government incentives cover only about 11 percent of the industry's actual costs and 14 percent of the potential MDR collection.

Under amendments to the Payment and Settlement Systems Act of 2007, passed by parliament this week, the government is now permitted to specify electronic payment methods via notification that may continue to enjoy legislative protection from charges. Nevertheless, the government has not yet authorized the imposition of MDR.

The UPI and Services Management Committee, headed by the National Payments Corporation of India (NPCI), will determine the MDR structure and the threshold above which UPI transactions will be charged a fee. The government currently insists that any MDR will only apply to a limited set of merchant transactions exceeding a set threshold and at a nominal rate significantly lower than that charged on debit or credit cards.

The report specifically highlights that creating a viable revenue mechanism is crucial for ensuring the financial sustainability of the UPI ecosystem without constant strain on the public treasury.

Minister's Statements

Union Minister of Finance and Corporate Affairs Nirmala Sitharaman stated in the Rajya Sabha on Monday that any future charges for digital payments will pertain only to a limited category of merchant transactions exceeding a high threshold. She added that consumers will be able to continue making instant digital payments through UPI without paying a fee.