This content is blocked because you are not allowing cookies.

To view this content, click on Cookie Preferences here or at the bottom of the page to allow all cookies.

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 volumes, India’s unified payment interface, popularized cashless transactions in the country by offering free services for all. That’s about to change. Starting next month, merchants will need to pay a fee of 0.4% for accepting payments higher than $20.

While the government has defended the move, confident it will not hurt India’s march towards a cashless economy, critics disagree.

Any thoughts on today’s newsletter? Share them with the team.

The big story

The Indian government’s decision to charge a fee to merchants using its globally lauded real-time digital payment system, UPI, that undercuts the usage of Visa and Mastercard, has sparked an intense debate in the country.

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

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

The umbrella organization that manages India’s retail payments and settlement systems said that person-to-person transactions on UPI will remain free, and even the fee charged to merchants is far 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 a fee to merchants.

“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.

Head of Meta’s WhatsApp Pay Kunal Shah called it a “great move forward.” Another popular payment app, Paytm, said that the measure will generate additional revenue from merchant business.

In 2020, the Indian government cut the merchant discount rate, the fee incurred by merchants for accepting payments via UPI, to zero to promote digital transactions in the country. Following the move, the transaction value on UPI increased 10-fold to 213 trillion rupees over roughly 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, drawing criticism.

Former CEO of Indian fintech company BharatPe, Ashneer Grover, has criticized the move to charge the merchant 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, saying 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 transacting in cash.

Level playing field

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

Those 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 payments services “appear to favor Indian domestic suppliers over foreign suppliers, creating a non-level playing field.”

The USTR report also said that American electronic payment services suppliers could not participate in the Indian ecosystem, including credit transactions on UPI, and 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 work in favor of card companies such as Visa, Mastercard and Amex.

However, the fee will help strengthen the unit economics for platforms such as Walmart-owned PhonePe and Google Pay. The two payment apps together account for nearly 85% of UPI transactions by value and 81% by volume, as per 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 about 67% of transaction value, according to a report by Reuters, which creates a huge pool of revenue 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 said, adding that it pushed fintech companies to rely on “cross-selling financial products and value-added services” to make money.

Need to know

India’s retail inflation hits 4.8% in August, rises for 10th straight month

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

Indian Prime Minister Modi says border peace is key to India-China ties

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

Coming up

Sept. 17: National Stock Exchange IPO opens.

Sept. 23: HSBC Flash PMI for September.

President Donald Trump on Wednesday threatened to impose tariffs on the European Union or halt trade with the bloc entirely if it proceeds 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 landing in North Carolina. He conditioned his threat on the intention of European leaders, saying 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 remarks came after European Commission President Ursula von der Leyen said EU was opening the door for Canada to become the first associate member of the 27-member bloc.

Associate membership doesn’t currently exist as a formal category under EU treaties, and any such arrangement would need to be created and ratified by member states.

The proposal came as Brussels and Ottawa seek to deepen ties, signaling a significant shift in the EU, which had been lukewarm to Germany’s proposal in May for granting an associate membership to Ukraine.

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

Canadian Prime Minister Mark Carney, who attended the address, has said in the past that Ottawa was keen to pursue a “unique security and economic alliance” with Europe, but not a 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 slapped 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 hasn’t 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.

Oil prices fell Thursday as Saudi Arabia shifts some crude exports through the Strait of Hormuz to compensate for the closure of a key pipeline, easing market fears that the outage will cause another major disruption to global supplies.

Brent futures, the international benchmark, lost $1.01 to close at $104.82 per barrel. U.S. West Texas Intermediate crude shed 52 cents to settle at $101.91. U.S. crude oil is up nearly 2% for the week and has advanced more than 18% for the month.

The Saudis are making additional crude cargoes available to Asian refiners through ship-to-ship transfers just outside Hormuz near Oman’s Sohar port, sources familiar with the matter told Reuters.

Shuttle vessels transport crude through Hormuz and then load it onto tankers waiting outside the strait, which allows these ships to avoid the risk of Iranian attack while sailing into the Gulf.

Saudi crude loadings at its Mideast Gulf ports are up so far this month, said Matt Smith, director of commodity research at Kpler. And ship transfers in the Gulf of Oman have risen to 2.7 million barrels per day compared with 1.5 million bpd in August, Smith said. But it is difficult to know whether the Saudis or other Gulf states are behind those transfers, he said.

U.S. Energy Secretary Chris Wright told CNBC on Tuesday that the Saudis have taken “quick action” to export more oil through Hormuz with the assistance of the U.S. military.

Earlier this week, the Saudis halted crude loadings at the Red Sea export terminal at Yanbu and canceled some shipments to European customers, industry sources told Reuters.

Yanbu has become Saudi Arabia’s key route for oil exports since Iran began attacking tankers in the Strait of Hormuz following U.S. and Israeli attacks on the country in late February.

The Saudis closed the East-West pipeline late last week after it sustained damage in a drone attack launched from Iraq. The U.S. Energy secretary told CNBC the outage is a “brief and temporary interruption” that “will be measured in days.” But independent analysts warn it could take weeks or months to repair the damage.

Rapidan Energy expects Saudi crude oil exports to fall by 400,000 barrels per day this month due to the pipeline outage. But lower shipments from Yanbu should be partly offset by higher exports through Hormuz, Rapidan said.

“Risk remains skewed toward a larger disruption if the pipeline outage extends past September or Iran, the Houthis, or other proxy groups escalate attacks,” Rapidan told clients in a Thursday note.