Reduced FY26 outlay for P2M promotion concerns industry, say experts

Incentives to promote such digital payments slashed for 2nd year straight

The government has slashed the FY26 outlay for promoting peer-to-merchant (P2M) Unified Payments Interface (UPI) transactions and RuPay debit card payments. Though there is a provision that this outlay may be increased at a later stage, experts say this will still not be enough to cover the cost of such transfers.

 

For a second straight year, the Union Budget for 2025-26 has slashed the government’s financial incentive to promote such transactions by 78 per cent to Rs 437 crore in FY26, from Rs 2,000 crore allocated the year before. 

 

However, the final allocation of funds for promoting P2M UPI transactions and RuPay debit card payments tends to be higher than the initial outlay. In FY25, the government had set aside Rs 1,441 crore as incentives but later revised it to Rs 2,000 crore. The government approved the incentive in 2022 with an initial outlay of Rs 2,600 crore.

 

 

“There may be a slight increase in the final outlay for this provision, but it would still not be enough to cover the cost of P2M transactions. We estimate that at least Rs 4,000 crore to Rs 5,000 crore is needed in the form of subsidies for the industry to cover these costs, especially since UPI is also growing,” said Mihir Gandhi, partner and payments transformation & fintech leader at PwC India.

 

The UPI incentive is provided alongside a zero merchant discount rate (MDR) on all debit UPI transactions. MDR refers to the fee charged to merchants by payment processing companies or banks to execute a transaction. Banks and digital payment processing firms bear the costs of processing transactions on India’s real-time payments system.

 

“We are keenly awaiting the incentives for the period from April 2024 to now. The ecosystem players, including banks, have been waiting for them since the UPI incentives have not been paid for this financial year, particularly in the absence of a zero MDR,” said Vishwas Patel, chairman of the Payments Council of India (PCI).

 

Gandhi added: “Now, companies are earning revenue through other products by means of cross-selling. The government may have also considered allowing some slab-based MDR for specific UPI transactions this year. These could be two potential considerations regarding incentives this year.”

 

The provision is intended for the payment of incentives to acquirer banks, which then share them with issuer banks, payment service providers (PSPs), and third-party app providers (TPAPs). TPAPs include companies such as PhonePe, Google Pay, and Paytm, among others.

 

According to a PwC report, stakeholders, including banks, TPAPs, and the National Payments Corporation of India (NPCI), incur a cost of approximately 0.25 per cent of the transaction value for processing a UPI P2M transaction.

 

The contribution of UPI to the cumulative digital payments ecosystem more than doubled in five years, rising from 34 per cent in 2019 to 83 per cent in 2024, according to data from the Reserve Bank of India’s (RBI) payment system report.

 

In 2024 alone, UPI recorded over 172 billion transactions.

 

NPCI, the apex payments body, had requested incentives for BHIM (Bharat Interface for Money)-UPI and RuPay debit card transactions to create a cost-effective value proposition for ecosystem stakeholders, increase merchant acceptance footprints, and accelerate the transition from cash payments to digital payments, according to a press release by the Ministry of Electronics and IT.