UPI fee threatens to push festive apparel buyers back to cash

India’s fashion and apparel retailers are heading into the festive season with an unexpected new pressure on margins. The government’s decision to introduce a 0.4 per cent Merchant Discount Rate (MDR) on UPI person-to-merchant transactions above Rs 2,000 from October 15, capped at Rs 300 for ticket sizes of Rs 75,000 and above, has drawn resistance from industry trade bodies.

The impact is particularly significant for apparel because its average transaction value is substantially higher than that of everyday categories. While grocery and convenience purchases frequently remain below Rs 500, apparel bills typically range between Rs 2,500 and Rs 8,500, placing a large proportion of transactions within the levy.

Although consumers are not directly charged, retailers must absorb the cost. For independent stores operating with gross operating margins of around 12-18 per cent, even a seemingly small payment charge can become material during high-volume periods. The immediate concern is that retailers could begin encouraging cash payments or restructuring transactions to remain below the Rs 2,000 threshold.

Festive sales meet fixed costs

The timing adds to the pressure. The festive quarter can account for as much as 40 per cent of annual revenue for garment manufacturers and multi-brand retailers, making the October-December period critical for inventory liquidation and cash generation.

The Clothing Manufacturers Association of India’s festive survey found 82 per cent of garment manufacturers expect sales to match or exceed last year’s levels, with 52 per cent anticipating higher offtake. At the same time, the Retailers Association of India’s Retail Business Survey Round 73 reported overall retail growth of about 8 per cent year-on-year heading into August.

For apparel retailers, the problem is that the cost structure for the festive season is already largely locked in. Autumn and festive merchandise is ordered months in advance from production centres including Tirupur, Surat and Ludhiana. Retailers therefore have limited scope to renegotiate supplier prices or materially alter ticket prices just as customers arrive.

“Introducing MDR on UPI at the start of festive season could not have come at a more challenging time for the industry,” says Santosh Katariya, President of the Clothing Manufacturers Association of India. Katariya explains retailers were already working to revive demand and improve margins and argued that an additional digital-payment cost could put further pressure on the system.

Bigger baskets, bigger leakage

The mathematics become more visible with high-value festive purchases. Consider an ethnic and bridal-wear outlet in Ahmedabad’s Ratanpole market. A family shopping basket comprising a silk sherwani, two women's salwar suits and accessories could total Rs 18,500. At a 0.4 per cent MDR, the retailer would incur Rs 74 on that single transaction.

At 120 comparable transactions a day over 10 peak shopping days, the cumulative cost would cross Rs 88,000. For a retailer already carrying substantial seasonal inventory and working-capital exposure, such costs can quickly become significant. Stakeholders say some merchants are responding with cash discounts or by splitting transactions below the Rs 2,000 threshold. If sustained, that could reverse some of the digital-payment gains made across India's traditional retail network.

Formalisation faces a new friction

The industry's larger concern extends beyond the payment charge itself. Retailers argue that making digital transactions more expensive could encourage a shift towards cash at precisely the point when India's retail economy has been moving towards greater traceability.

“Small merchants will now think twice about whether to accept cash or UPI,” opines Kumar Rajagopalan, CEO, Retailers Association of India. He argues a fee attached to higher-value digital transactions could make cash more attractive during the festive period and potentially weaken the formal transaction trail supporting GST reporting.

The industry is also questioning whether a uniform MDR is appropriate for account-to-account UPI payments. Rajagopalan explains transactions funded directly from bank accounts should be treated differently from UPI payments linked to credit lines, where a merchant fee may reflect a different underlying cost structure. The association has called for the government to bear the cost of normal UPI transactions, arguing that digital payments generate traceability and support tax compliance.

Organised retail has more room

The potential competitive impact is uneven. Large apparel chains and department-store networks have greater scale to negotiate payment arrangements with acquiring banks or absorb relatively small transaction costs within their operating structures.

Traditional high-street retailers have less room. Independent clothiers and semi-organised operators, which account for over 60 per cent of India's domestic textile distribution as per industry estimates, operate with tighter working-capital cycles and fewer avenues for spreading incremental costs. That creates a potential channel divide: organised retailers may be better positioned to retain digital checkout as standard practice, while smaller merchants could increasingly use cash discounts or other mechanisms to reduce payment costs.

A digital retail test

The issue arrives at a critical juncture for India's apparel economy. The domestic apparel market is estimated at around $105 billion, with industry projections pointing towards $135 billion. The sector represents over 20,000 manufacturers and hundreds of thousands of independent retailers and clothiers.

Over the past decade, UPI has helped move this fragmented retail network from predominantly cash-based transactions towards bank-settled, digitally traceable commerce. The apparel industry's objection is therefore not simply about a 0.4 per cent cost. It is about whether adding a charge to high-value digital transactions changes merchant behaviour at the very point when festive purchasing generates some of the year's largest baskets.

As trade bodies prepare representations to the Ministry of Finance and the National Payments Corporation of India, the immediate test will be whether the new payment economics remain a marginal operating cost or becomes an incentive for India's high-street apparel trade to put cash back at the centre of the festive checkout.