An extremely well-known episode from the early life of Mahakavi Kalidasa, the towering figure of Sanskrit literature, illustrates the point. Kalidasa, then devoid of knowledge and understanding, was cutting with an axe the very branch of a tree on which he was sitting. Passers-by warned him that doing so would cause him to fall and injure himself, but Kalidasa ignored their warning. The inevitable happened: the branch was cut and he came crashing down.

It was only after this self-destructive act, when scholars made him aware of the truth, that his ‘eyes of knowledge’ opened. He emerged from the darkness of ignorance and began his journey towards the light of wisdom.

A similar policy mistake today

In the context of India’s digital economy, the Central Government’s decision to impose a 0.4 per cent Merchant Discount Rate (MDR) on merchant payments above ₹2,000 from 15 October 2026 appears to be a similar policy mistake. The government is preparing to use the axe of charges on the very ‘branch’ of digital transactions and the cashless economy on which it is sitting while claiming that these have helped expand the country’s GDP and tax collections.

UPI’s decade of transformation

Over the past decade, the Unified Payments Interface (UPI) has emerged as one of India’s biggest success stories. It has transformed the country’s economic landscape, with more than 550 million active users and millions of small and large merchants connected to the system. As transactions moved into the digital sphere, the informal economy increasingly came within the ambit of the banking system. As a result, the government’s GST collections have risen to record levels of around ₹1.8 lakh crore to ₹2 lakh crore per month.

Free transactions: the foundation of UPI’s success

The single biggest pillar of UPI’s unprecedented success has been the fact that it has remained completely free. Consumers and merchants adopted it because it was safer than cash and cost nothing. However, with a 0.4 per cent charge, capped at ₹300, now being proposed on transactions above ₹2,000, it would be reasonable to consider the possibility that the move could prove self-defeating for the Central Government.

The numbers behind the concern

There are concrete facts and figures behind this concern that cannot simply be dismissed. Retail traders in India generally operate on very thin net profit margins, typically in the range of 3 to 5 per cent. If the government imposes a 0.4 per cent charge on them, it would directly take away around 10 to 13 per cent of their profits.

The likely consequence is that merchants may either compel or encourage customers to return to cash payments in order to avoid the charge. At the same time, the introduction of this fee could result in a substantial 15 to 20 per cent decline in high-value merchant digital transactions.

The cost of maintaining UPI

The government’s argument is that running UPI infrastructure costs approximately ₹20,000 crore annually and that the charge is necessary to recover this expenditure. However, like Kalidasa, the government may be failing to look at the long-term consequences.

If even 15 per cent of transactions were to shift back to cash—black money or unaccounted cash—it would reduce transparency in the economy. The resulting loss to the government in GST and corporate/income tax collections could be far greater than the ₹20,000 crore revenue generated through the UPI charge—estimated to exceed ₹50,000 crore.

In other words, in pursuit of a relatively small additional source of revenue, the government could end up weakening a much larger tax base.

The cost will ultimately reach consumers

On the other hand, although the government maintains that the charge will be imposed on merchants, a basic principle of economics is that every indirect cost is ultimately passed on to consumers. Merchants could increase the prices of their products by between 0.5 and 2 per cent.

This could fuel indirect inflation in the market and weaken public confidence in digital payments. Such a possibility cannot be ruled out, particularly because neither the States nor the Centre exercise effective control over the relationship between costs and the Maximum Retail Price (MRP). Merchants have considerable discretion in determining the MRP of their products.

Learning from Kalidasa

We therefore return once again to Kalidasa. When he was made aware of his mistake, he abandoned superstition and ignorance, devoted himself to the worship of Goddess Saraswati, and went on to create great works of literature.

Similarly, the Central Government needs to open its ‘eyes of economic knowledge’. In fact, the principle of national infrastructure suggests that just as the government builds national highways, railway lines and public parks and treats the expenditure involved not as a cost to be recovered directly from citizens but as the ‘cost of national development’, UPI too should be regarded as digital infrastructure—a public asset.

Subsidy rather than a charge

The facts therefore point towards subsidy as the appropriate course of action in this entire matter. Instead of taking money out of merchants’ pockets, the government should provide permanent annual financial support of ₹15,000 to ₹20,000 crore from the Union Budget to banks and the National Payments Corporation of India (NPCI).

Compared with the boost that this provides to the country’s GDP and the gains from transparent tax collection, such expenditure is extremely modest. The government and its economic experts are well aware of this.

Do not kill the golden goose

In reality, imposing charges on UPI is akin to killing the hen that lays the golden eggs—the very system that generates crores of rupees in tax revenue for the government every day.

If the government does not review the decision in time and open its policy-making ‘eyes of knowledge’, this historic branch of Digital India could be cut down, pushing the country’s economy back towards the old and less transparent era of ‘cash is king’.

Learning from Kalidasa’s example

It would be better if the Narendra Modi government at the Centre learnt something from Kalidasa’s mistake. After all, the Bharatiya Janata Party (BJP), the political party in power at the Centre, pays tribute to Kalidasa every year on his birth anniversary for his contribution to learning and knowledge. One hopes, therefore, that it will also learn from his conduct. The charge should be withdrawn immediately so that the digital foundations of the country remain secure.

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Hindusthan Samachar / Mayank Chaturvedi