I have long believed that free, democratic societies built on free-market economics move through three broad phases — empowerment, enablement, and engagement. This framework explains something pure economics often misses: why some perfectly sound reforms land smoothly, while others — involving far smaller sums of money — set off disproportionate outrage. The current noise over the Merchant Discount Rate (MDR) on UPI payments is, to my mind, a textbook example of a society well into its engagement phase being asked to do something that phase inevitably demands, and not entirely enjoying it.
Three phases of freedom
Empowerment comes first. People are given the constitutional and legal rights to build the social and economic order of their choosing. The political structure that follows is mostly downstream of that economic choice, and for societies opting for a free, capitalist economy, parliamentary democracy has proven the most durable vehicle. The move from aristocracy or oligarchy to full parliamentary democracy is rarely smooth, if only because a newly enfranchised electorate is not always equipped, through education or experience, to identify the wisest rulers or the wisest policies on the first attempt.
Enablement follows. People empowered on paper now need to be enabled, in practice, to walk the economic path of their choice. Social equality, economic equality and gender equality are the usual stated goals, and the tools are familiar the world over — redistribution through taxation and welfare, land-ceiling laws, restrictions on asset ownership, and affirmative action to bring the economically poor, the socially marginalized and women into government and commerce. This phase is rarely peaceful. Tension between the propertied and the dispossessed spills into social unrest, and institutions that are still too young or too weak to supervise redistribution honestly tend to generate more corruption, not less. There is also a subtler failure I have seen recur across very different countries: some of enablement’s intended beneficiaries become powerful enough, in turn, to appropriate resources meant for their peers — reproducing, under a new banner, the very inequity the phase was meant to correct.
Engagement is the pay-off. The empowered and enabled population now participates directly in building the economic institutions and free markets around it. This is usually the golden period for any society that has chosen the free-market route — a larger share of the population riding the virtuous loop of earning, consuming, saving, investing and earning again, which is what sustainably higher consumption and investment demand actually looks like from the inside.
The pattern elsewhere
This sequence is not uniquely Indian and the three phases need not run in a fixed order. South Korea and Taiwan are the clearest case of the sequence inverting rather than merely compressing: both achieved deep economic engagement — export-led manufacturing, mass industrial employment, rising incomes — for years under authoritarian rule, and only democratized, and so achieved political empowerment, in the late 1980s. Enablement and economic engagement arrived first; political empowerment followed. Post-1989 Eastern Europe shows a different risk: rapid privatization, undertaken before institutions were mature enough to supervise it, let a small circle of insiders capture state assets almost overnight, delaying the broader population’s engagement by a decade or more even as headline growth recovered. The United States offers a longer, messier version of the classic order — its constitutional empowerment dates to the 1780s, but it took roughly 190 years, until the Voting Rights Act of 1965, before that empowerment was extended in practice to all its citizens, and arguably longer still before enablement was complete. The lesson I take from all three is that empowerment, enablement and engagement are better thought of as three tracks — political, redistributive and economic — that often but do not always move in step, rather than one fixed sequence every society must climb in order.
India’s long road to engagement
India’s constitutional framework offered both a democratic polity and a free-market economy from the day the Constitution came into force, 26 January 1950. In that narrow sense, India’s empowerment was immediate and complete — faster, in fact, than the American experience above. In practice, though, I would argue meaningful empowerment was delayed by at least three decades. The Indian National Congress, which had led the freedom movement, converted itself into the ruling party, and its leadership through the 1950s, 60s and 70s remained heavily drawn from the country’s landed and professional elite. Policy through this period concentrated control over resources and enterprise with the state, leaving room for little beyond bare necessities for the ordinary citizen, and space for organized dissent was narrow — what opposition existed came mostly from communist and socialist groupings whose support base tended to be regional or sectional rather than national.
The first genuinely nationwide push for real empowerment took shape in the mid-1970s, under Jayaprakash Narayan, and the Emergency that followed only sharpened the demand once it was lifted. Momentum built through the 1980s, and enablement began in earnest a decade after the Mandal Commission submitted its report, when V.P. Singh’s government implemented its recommendations in August 1990. As with most enablement phases, India’s has been shaped as much by electoral calculation as by social or economic logic, and it has carried the familiar costs — patchy execution, leakages, and no shortage of allegations of corruption along the way.
The socialist and regional political current that Mandal unleashed gained real power through the 1990s and 2000s, at various points anchoring or propping up the federal government. It could not sustain its early energy — several of these parties settled into family- or faction-led leadership that looked, in time, uncomfortably similar to the entrenched structures they had set out to replace. But the underlying shift proved durable: Indian governance since then has grown structurally more welfare-oriented, and India’s states and local bodies now hold far more real power than they did in 1980.
On reflection, the real trigger for India’s economic engagement was 1991. The dismantling of the license-permit raj, the opening of the economy to trade and foreign capital, and the birth of a modern equity and mutual-fund culture that followed are what first let ordinary Indians participate directly in building enterprise and markets rather than simply receiving what the state chose to redistribute. That leaves a gap I should be honest about: enablement (1990, via Mandal) and the start of economic engagement (1991) arrived almost simultaneously, while political consolidation of the enablement agenda — more welfare-oriented governance, more powerful states — continued to unfold for another two decades alongside it. The two tracks ran side by side rather than one strictly following the other, which is itself a reminder that this framework describes overlapping currents more than a clean staircase.
2014 marked broadening and deepening of the engagement phase— and, again whatever else one makes of the government’s record, that period has combined continued affirmative action for the underprivileged with a decisive widening of the direct-tax base and of market participation. Personal income tax collections now exceed corporate tax collections; private enterprise, including a wave of new-age companies in defence, space, medical research and manufacturing, is doing real work alongside the state; indirect-tax participation has widened; and household savings are flowing into financial markets at a scale that makes retail investors, for the first time, a meaningful source of growth capital. The 1990s built the plumbing; the last decade is where the volume running through it has become large enough to matter for the aggregate economy.
Engagement, though, meets resistance every step of the way. Privatization proposals are met with cries of cronyism. Every effort to raise the tax-to-GDP ratio runs into pushback. Direct contribution from citizens who have drawn on public infrastructure and subsidies for two generations is too often read as an imposition rather than a fair ask. That is not, historically, how the economics of development actually works — somebody has always had to pay for the plumbing, literal or digital.
Reading the UPI-Fee in this light
The row over the Merchant Discount Rate on UPI belongs squarely in this bucket. From 15 October, the National Payments Corporation of India will apply a 0.4% MDR on person-to-merchant UPI payments above ₹2,000 — a charge that sits with the merchant, not the customer, and merchants are explicitly barred from passing on to the price a customer pays. Peer-to-peer transfers stay free at any size, as do merchant payments under ₹2,000. Small merchants receiving up to ₹1 lakh a month through a UPI QR code are exempt altogether, and essential services — railways, fuel, telecom, insurance — get a flat, low fee rather than a percentage cut. By NPCI’s own reckoning, barely 4% of merchant transactions will be touched at all. What this buys is a modest, dedicated revenue stream to fund the servers, fraud detection and cybersecurity that a network clearing close to ₹30 lakh crore a month genuinely needs, instead of leaning indefinitely on the exchequer to keep something running that has never actually been free to operate.
This, to me, is engagement working as intended, not oppression dressed up as reform. The people being asked to contribute are precisely the ones who have gained the most from a public digital rail built at public expense — merchants who no longer pay card-network swipe margins, and the platforms layered on top of UPI. If UPI is to remain the backbone of Indian retail commerce for another decade, someone has to fund the upkeep, and it need not be the taxpayer carrying that alone.
What it means for investors
Payment companies — issuing banks, acquiring banks and payment aggregators — gain access to a real, durable UPI revenue pool for the first time since MDR on UPI and RuPay debit was zeroed out in 2020; watch for read-through to listed payments and fintech names.
Small and informal merchants are shielded by design, so there is no near-term disruption risk to the grassroots digital-payments adoption that underwrites the broader financial-inclusion and formalization theme.
The cost-sharing template used here — protect the retail base, charge the commercial layer — is a plausible model for monetizing other public digital rails (ONDC, the Account Aggregator framework, OCEN), and worth tracking for any portfolio exposure to platforms built on India’s digital public infrastructure.
The broader signal — a rising share of direct taxes, deepening retail participation in markets, and now direct monetization of public payment infrastructure — is consistent with my longer-running thesis that India’s financialization is structural, not cyclical, and continues to favor domestic financial intermediaries over time.
I keep returning, at moments like this, to the idea at the heart of the Bhagavad Gita’s discussion of yajna — that any system, cosmic or economic, is sustained only by what its participants are willing to put back into it, not merely by what they draw out. A nation that wants its digital public goods to last will eventually have to fund them the way it funds everything else that lasts: through contribution, not entitlement. That, more than any single percentage point of MDR, is the real story here.