India digital payments fee risks boosting cash use

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India digital payments fee risks

Highlights

From November, UPI transactions above Rs2,000 will incur a 0.4 per cent fee for business payments, with 83 per cent of surveyed merchants unwilling to absorb the cost.
Currency in circulation hit a record Rs42.7tn at end-September 2026 and India's cash-to-GDP ratio returned to 12 per cent, highlighting persistent shadow economy activity.
UPI processed about 242bn transactions in the latest financial year, but new fees and regulatory scrutiny are expected to further boost cash usage, especially among small businesses ahead of 2027 elections.

UPI fee change reshapes merchant payment choices

As reported by Financial Times, a 0.4 per cent charge is set to apply from next month to UPI transactions above Rs2,000, with business payments liable while person-to-person transfers and small merchant payments remain exempt. Merchants say the added cost threatens the zero-charge model that helped turn UPI into India’s most widely used digital payments interface.

At Care Chemist pharmacy in Mumbai, manager Mushtaq Ahmed says about eight in ten purchases are currently digital, but he expects to handle much more cash once the fee takes effect in November. He says the store cannot sell medicines above printed prices, meaning it may accept cash, cards or cheques instead, or split transactions into smaller amounts to avoid the surcharge.

A recent Local Circles survey of 32,000 businesses found 83 per cent of merchants are not willing to absorb the extra costs. The National Payments Corporation of India, which operates UPI and is owned collectively by dozens of banks, says the fee will help cover about Rs200bn in annual system maintenance costs, while the platform also receives Rs20bn in government subsidies in the current financial year.

Record cash circulation reflects wider shadow economy pressures

Cash use continues to expand alongside digital adoption, underlining what Reserve Bank of India deputy governor Shirish Chandra Murmu calls a “cash paradox”. Currency in circulation is now about 2.3 times its level before the 2016 demonetisation drive and reaches a record Rs42.7tn at the end of September 2026, while India’s cash-to-GDP ratio returns to about 12 per cent, among the highest for major economies.

Economists say demand for notes and coins is being supported by the shadow economy, inflation and political spending. Madan Sabnavis of Bank of Baroda says cash remains attractive because it offers anonymity for bribes, illicit political expenditure, real estate deals and goods and services tax avoidance, while Madhavi Arora of Emkay Global Financial Services projects cash in circulation will grow 12 per cent in the current financial year.

UPI still processes roughly 242bn transactions in the latest financial year, nearly 12,000 times its first full year of operation, showing that digital and cash payments are growing together rather than one fully replacing the other. Analysts also say tighter scrutiny of digital transactions by tax officers has already pushed some small businesses back to cash, and they expect that shift to intensify as the new fee comes into force ahead of Uttar Pradesh state elections due in February 2027.

Our earlier article on Philippine e-commerce payment trends highlighted that cash-on-delivery still represents a sizable share of online transactions even as QR codes and bank transfers surge. It also noted that many shoppers abandon purchases when their preferred payment method isn’t offered, pushing merchants to support a wider mix of options despite the broader rise in digital payments.

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