Even as government considers MDR charge on UPI, data shows cash usage quickening in economy

The potential imposition of an MDR on UPI transactions marks a significant shift in India's digital payments policy. MDR is the fee merchants pay to banks and payment service providers for processing digital transactions. The government currently subsidizes these costs for UPI and RuPay to promote financial inclusion and a less-cash economy. The Taxation and Other Laws (Amendment) Bill, 2026 suggests a pivot toward making the payment infrastructure self-sustaining by passing costs to larger merchants. However, the economic concern is the pass-through effect: merchants may increase prices to cover the MDR, effectively transferring the cost to consumers. This could inadvertently disincentivize digital payments, especially for low-margin businesses, pushing them back to cash transactions, thereby reversing gains made under the Digital India initiative.

The concurrent growth of both cash with the public and UPI transactions presents a macroeconomic puzzle. Normally, rapid digital adoption should lead to a relative decline in cash usage. Experts point out that the rising 'Cash with the Public' metric (total cash in circulation minus bank reserves, as tracked by the RBI) alongside double-digit UPI growth suggests high money velocity—the rate at which money changes hands. Economists suggest two primary interpretations. First, it could indicate a vibrant economy with real growth exceeding 7%, requiring more mediums of exchange. Conversely, as noted by former Chief Statistician Pronab Sen, this expansion in the money supply and transactional volume should logically translate to higher inflation. If official retail inflation (CPI) and wholesale inflation (WPI) are low (around 4.5% and 9.8% respectively in this data), it suggests possible data under-reporting or a mismatch between the inflation basket and actual consumer spending.

The persistence and resurgence of cash usage also reflect deep-rooted structural realities in the Indian economy. While digital payments have revolutionized urban retail, the informal sector—which employs the vast majority of India's workforce—remains heavily cash-dependent. A rising demand for cash could also indicate systemic distress, such as high unemployment or rural wage stagnation. In times of economic uncertainty or joblessness (especially among youth), households often prefer the liquidity and anonymity of cash over digital platforms. Therefore, while UPI growth signifies the formalization of the economy, the parallel growth in cash reminds policymakers of the enduring informality and potential vulnerabilities within the broader socioeconomic landscape.