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Hello, this is Priyanka Salve, writing to you from Mumbai.

Welcome to the latest edition of “Inside India” — your one-stop destination for stories and developments from the world’s fastest-growing large economy.

The world’s largest payments system by volume, India’s unified payment interface, popularized cashless transactions in the country by offering complimentary services to all. This is about to change. Starting next month, merchants will need to pay a fee of 0.4% for accepting payments exceeding $20.

While the government has defended the move, confident it will not harm India’s progression toward a cashless economy, critics disagree.

What are your thoughts on today’s newsletter? Share them with the team.

The main story

The Indian government’s decision to charge merchants using its globally acclaimed real-time digital payment system, UPI, which competes with Visa and Mastercard, has ignited intense debate in the country.

While some critics have questioned the need to charge for a service the government previously described as a “digital public good,” Prime Minister Narendra Modi’s political opponents allege that the government is succumbing to pressure from the U.S.

On Tuesday, the National Payments Corporation of India announced that a 0.4% charge will be applied to merchants receiving payments via UPI above 2,000 rupees ($20.84). For transactions exceeding 75,000 rupees, the fee will be capped at 300 rupees per transaction, it added.

The umbrella organization managing India’s retail payments and settlement systems stated that person-to-person transactions on UPI will remain free, and even the fee charged to merchants is significantly lower than the 0.9% on debit card transactions and 1.5%-2.5% on credit cards.

Bouquets and brickbats

Fintech companies have welcomed the move to charge merchants a fee.

“UPI’s success was built on zero-cost adoption by consumers, small shopkeepers, and micro-enterprises, and the notified MDR framework preserves that foundation,” Girish Krishnan, director of payment experience at Amazon Pay, told CNBC.

Meta’s WhatsApp Pay head Kunal Shah called it a “great step forward.” Another popular payment app, Paytm, stated that the measure will generate additional revenue from merchant businesses.

In 2020, the Indian government reduced the merchant discount rate, the fee incurred by merchants for accepting payments via UPI, to zero to promote digital transactions in the country. Following this move, the transaction value on UPI increased tenfold to 213 trillion rupees over approximately six years ending January 2025.

“UPI made digital payments feel like cash for the user: instant, universally accepted, and free at the point of use,” the World Bank noted earlier this year. That “feeling” is set to change, bringing the government’s move under close scrutiny and drawing criticism.

Former CEO of Indian fintech company BharatPe, Ashneer Grover, has criticized the move to charge merchants a fee, adding that “any levy on UPI is just tax collection.”

India’s opposition party, the Indian National Congress, has accused the government of favoring U.S. firms, stating that the step will lead to money being “collected from the pockets of Indians to fill the coffers of American companies,” such as PhonePe, Google Pay, and Amazon. Some commentators have said the move will encourage people to return to cash transactions.

Level playing field

The UPI payment system processes an average of more than 1.1 million transactions every two minutes, according to NPCI data for September. In January, the Indian government stated that UPI has surpassed Visa in terms of daily transaction volumes, accounting for 85% of digital payments in India and 50% globally.

These figures caught the attention of the U.S. Trade Representative’s office, which in its report earlier this year flagged concerns that policies governing India’s electronic payment services “appear to favor Indian domestic suppliers over foreign suppliers, creating a non-level playing field.”

The USTR report also stated that American electronic payment service providers could not participate in the Indian ecosystem, including credit transactions on UPI and the domestic card payment network RuPay.

Experts told CNBC that while UPI will no longer be free for all, the new merchant fee was unlikely to benefit card companies such as Visa, Mastercard, and Amex.

However, the fee will help strengthen the unit economics for platforms like Walmart-owned PhonePe and Google Pay. The two payment apps together account for nearly 85% of UPI transactions by value and 81% by volume, according to a report by Indian brokerage Ambit Capital.

“A 0.4% rate severely undercuts credit cards at 1.5% to 2% and debit cards,” Neil Shah, vice president of research at Counterpoint Research, told CNBC, adding that it gives merchants “every economic incentive to favor UPI rails.”

UPI transactions above 2,000 rupees account for just 4% of merchant payment volumes but approximately 67% of transaction value, according to a Reuters report, which creates a substantial revenue pool for payment system providers like banks and fintech companies.

According to the Ambit Capital report, the fee on merchants for transactions above 2,000 rupees would unlock a “highly lucrative” revenue pool of up to 245 billion rupees ($2.5 billion) for the sector.

“India’s unique zero-MDR [merchant discount rate] UPI environment is in stark contrast to high-margin global card markets,” the report stated, adding that it pushed fintech companies to rely on “cross-selling financial products and value-added services” to generate revenue.

Need to know

India’s retail inflation reached 4.8% in August, rising for the 10th consecutive month

India’s headline inflation increased to 4.82% in August from 4.45% in July, adding pressure on the country’s central bank to raise key benchmark rates. Inflation has been on the rise for 10 consecutive months in the world’s fastest-growing major economy.

Indian Prime Minister Modi states border peace is crucial for India-China relations

Indian Prime Minister Narendra Modi said on Saturday that “peace and tranquility” in border areas is essential for developing bilateral relations with neighboring China. Relations between the two countries, which had sharply deteriorated following a deadly border skirmish in 2020, have been improving for over a year.

Coming up

Sept. 17: National Stock Exchange IPO opens.

Sept. 23: HSBC Flash PMI for September.

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Oil prices continued falling on Thursday as worries about supply disruptions eased after attacks on Saudi Arabia’s critical East-West pipeline.

Brent futures, the global benchmark, traded slightly lower at $105.81 a barrel, while U.S. crude slipped 0.22% to $102.14.

Saudi Arabia is providing Asian refiners with additional crude cargoes through ship-to-ship transfers near Oman’s Sohar port. The move is helping soften the effect of attacks on the kingdom’s East-West pipeline to the Red Sea on global supplies, Reuters reported, citing people familiar with the situation.

U.S. Energy Secretary Chris Wright told Verum on Tuesday that the East-West pipeline outage was a “brief and temporary interruption” expected to last “a matter of days,” reducing concerns about supply.

Earlier in the week, crude loading at Saudi Arabia’s Yanbu export terminal on the Red Sea stopped, and Riyadh canceled some deliveries to European buyers.

Since Iran began blocking the Strait of Hormuz after U.S. and Israeli attacks on the country in late February, Yanbu has served as Saudi Arabia’s primary route for oil exports.

Peter Massabni, head of business development at XS.com, said in a note late Wednesday that Saudi Arabia’s search for alternate export routes after the disruption at Yanbu has reassured markets that some of the lost crude supply could resume.

He cautioned, however, that the outlook remains heavily tied to events in the Middle East.

Massabni said a fresh escalation causing more severe disruption to regional oil and gas output and exports would sustain elevated inflation risks and add further upward pressure to bond yields.

“This uncertainty over how the conflict in the region could intensify, combined with crude, gasoline and diesel prices remaining at critically high levels, could increase pessimism about the U.S. Federal Reserve’s monetary policy direction,” he wrote.

President Donald Trump on Wednesday warned he would impose tariffs on the European Union or cease trade with the bloc entirely if it moves forward with its plan to make Canada its first-ever “associate member.”

“I think it’s laughable … Canada has been a terrible trade partner,” Trump told reporters after arriving in North Carolina. He tied his threat to the intentions of European leaders, stating that “if I think it’s at all a hostile act, I will put very serious tariffs or stop trading with Europe on many things.”

Trump’s comments followed European Commission President Ursula von der Leyen’s announcement that the EU is considering opening the door for Canada to become the first associate member of the 27-nation bloc.

Associate membership is not currently a formal category under EU treaties, and any such arrangement would need to be established and approved by member states.

The proposal emerged as Brussels and Ottawa work to deepen ties, indicating a notable shift in the EU, which had previously shown lukewarm interest in Germany’s May proposal to grant an associate membership to Ukraine.

In her annual state of the EU address in Strasbourg, France, the EU chief stated the bloc aims to bring its relationship with Canada “to the highest level possible.”

Canadian Prime Minister Mark Carney, who attended the address, has previously said Ottawa is keen to pursue a “unique security and economic alliance” with Europe, but not full membership.

Canada has sought to diversify away from the U.S. following months of escalating trade tensions and as bilateral trade talks have collapsed. Trump has imposed a 50% tariff on Canadian goods and plans to ban the country’s dairy, alcohol and auto imports later this month, drawing retaliation from Ottawa.

“Washington and Ottawa may find an off-ramp from the current trade war, but Canada will continue to reduce its vulnerability to U.S. economic pressure,” said James Lindsay, a senior fellow at Council on Foreign Relations.

Von der Leyen’s pitch to Canada includes joint work on manufacturing, integration of defense-industrial bases, a tech alliance, energy, artificial intelligence and cooperation in the Arctic.

Canada is already the only non-European country in the EU’s SAFE instrument — an initiative that provides Canadian firms with preferential access to defense procurement — and has a free-trade agreement with the bloc, eliminating tariffs on roughly 99% of goods, though that deal still requires ratification by 10 EU states.

Any fresh U.S. tariffs on the EU would test the trade framework Washington and Brussels struck last year, which set a 15% tariff ceiling on most EU exports to the U.S.

Brussels has not said whether it will proceed with the associate-member proposal in the face of Trump’s threat. EU member states — several of which were reportedly blindsided by the announcement — are yet to respond to Trump’s threat.