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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 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 warned on Wednesday that the United States could impose tariffs on the European Union or stop trading with the bloc altogether if it moves forward with plans to make Canada its first associate member.

Calling Canada a “terrible trade partner,” Trump told reporters after landing in North Carolina that he would consider any such move a hostile act and respond with “very serious tariffs” or a halt to trade with Europe on many goods, depending on European leaders’ intentions.

Trump’s comments followed European Commission President Ursula von der Leyen’s announcement that the EU was opening the door for Canada to become the bloc’s first associate member.

Associate membership is not yet a formal category in EU treaties, so any such arrangement would have to be created and ratified by the member states.

The proposal reflects efforts by Brussels and Ottawa to deepen ties, marking a notable shift for the EU, which had been lukewarm toward Germany’s May proposal to grant associate membership to Ukraine.

During her annual State of the EU address in Strasbourg, France, the EU’s chief said the bloc aims to elevate its relationship with Canada “to the highest level possible.”

Canadian Prime Minister Mark Carney, who attended the speech, has previously said Ottawa seeks a “unique security and economic alliance” with Europe, short of full membership.

Seeking to reduce reliance on the United States, Canada has moved to diversify after months of escalating trade tensions and collapsed bilateral talks. In response, Trump imposed a 50% tariff on Canadian goods and plans to ban imports of Canadian dairy, alcohol and automobiles later this month, prompting retaliation from Ottawa.

James Lindsay, a senior fellow at the Council on Foreign Relations, said, “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.”

Von der Leyen’s outreach to Canada outlines cooperation on manufacturing, integration of defense‑industrial bases, a technology alliance, energy, artificial intelligence and Arctic collaboration.

Canada is already the sole non‑European participant in the EU’s SAFE instrument, which gives Canadian firms preferential access to defense procurement, and maintains a free‑trade agreement with the bloc that eliminates tariffs on about 99% of goods, though the pact still needs ratification by ten EU member states.

Any new U.S. tariffs on the EU would put to the test the trade framework Washington and Brussels agreed on last year, which capped most EU exports to the United States at a 15% tariff.

Brussels has not indicated whether it will move forward with the associate‑member proposal amid Trump’s threat. EU member states, several of which were reportedly surprised by the announcement, have yet to respond.

Oil prices continued falling on Thursday as concerns about supply disruptions eased following attacks on Saudi Arabia’s key East-West pipeline.

Brent futures, the international benchmark, traded slightly lower at $105.81 per barrel, while U.S. crude oil was down 0.22% at $102.14 a barrel.

Saudi Arabia is making additional crude cargoes available to Asian refiners through ship-to-ship transfers near Oman’s Sohar port, helping cushion the impact on global supplies from attacks on the kingdom’s East-West pipeline to the Red Sea, Reuters reported, citing sources familiar with the matter.

U.S. Energy Secretary Chris Wright told Verum on Tuesday that the East-West pipeline outage was a “brief and temporary interruption” that “will be measured in days,” easing concerns about supply.

Earlier this week, crude loadings at Saudi Arabia’s Red Sea export terminal in Yanbu were halted, and Riyadh canceled some shipments to European customers.

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

Peter Massabni, head of business development at XS.com, said in a note late Wednesday that Saudi Arabia’s efforts to find alternative export routes after the disruption at Yanbu had reassured markets that some of the lost crude supply could return.

However, he warned that the outlook remains highly dependent on developments in the Middle East.

Massabni said a renewed escalation that causes deeper disruptions to regional oil and gas production and exports would keep inflation risks elevated and put further upward pressure on bond yields.

“This uncertainty about possible escalation paths in the region, along with crude, gasoline and diesel prices remaining at high and critical levels, could fuel pessimism about the US Federal Reserve’s monetary policy path,” he wrote.