Even as government considers MDR charge on UPI, data shows cash usage quickening in economy
An analysis by The Hindu shows that the growth in the value of UPI transactions has been consistently slowing since 2021-22, although the current rate of growth is still higher than that of cash with the public
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Context
The government is considering allowing a Merchant Discount Rate (MDR) charge on and debit card transactions, which are currently free, via the proposed . Concurrently, data reveals a complex economic picture: while the growth of transaction values is slowing, cash in circulation is growing faster. Economists suggest this dual growth indicates either robust economic activity or underreported inflation, raising questions about consumer behavior and macroeconomic indicators.
UPSC Perspectives
Economic
The potential imposition of an MDR on 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 and to promote financial inclusion and a less-cash economy. The 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 initiative.
Macroeconomic
The concurrent growth of both cash with the public and 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 ) alongside double-digit 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 () and wholesale inflation () 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.
Social
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 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.