Moving towards a “LESS CASH” Economy, even if a “CASH-LESS” economy is not fully attainable

The recent demonetisation of high value notes has drawn huge reactions, largely favourable but many not so.  While the doomsday prophets are listing its various ills and evils,  the supporters are no less energetic in pointing out its benefits. Since these have been talked and written about continuously for the past one week,  I am not going to recount them here.

My purpose in writing this post is to draw the attention of the reader to one very important “fall-out”  benefit (what is typically called,  in chemistry, the by-product of a chemical reaction) of this action.  The following is what I envisage.

1. By December end- 86 % of the currency value in circulation in terms of old notes would have been sucked out of the system – be it by deposits in bank or by virtue of having being worthless paper.
2. A large part of this would have been replaced with NEW Notes,  but not all.  Thus the amount not replaced because it was not exchanged or deposited or surrendered would lead to a reduction in total cash supply in the market.
3. People who were forced to open Bank Accounts to deposit their “Old Notes Cash”  or already had accounts but were forced to deposit their  “Old Notes”  in them are clearly those that can be treated as additions to the banking system in terms of  “money value”  as also, in many cases,  “new accounts”.
4. One of the major complaints and grouse (perhaps understandable and to a certain extent true) has been that how can you overnight negate the use of cash in a country like India where reportedly 95 % of the transactions happen in case. Opposition leaders have mockingly asked repeatedly asked in Parliament – can you pay a Halwai by cheque or Card ? Can you pay the vegetable vendor by Cheque or Card ? Can you pay the local Kirana Store by Cheque or Card ? Can a villager pay the doctor/hospital by Cheque or Card ?
5. Their concern is correct because it is true that, today,  in most of the above cases you cannot.  However, this is more an issue logistics rather than intent.  Acceptance of payment by personal cheques is still a distant possibility in India as it requires a lot of trust and faith in the person giving the cheque ; therefore,  let me talk about payment by Card only.
6. Today we cannot pay the Halwai or the Vegetable Vendor by Card simply because he does not have a POS machine (of the type that you commonly see in many Petrol Pumps today). A common villager cannot make his payments by Card, simply because he does not have one.  Both these shortcomings are addressable.
7. All PSU Banks and PSUs should pool together resources to hand over to the estimated 12 million Kirana stores in India (figure taken from Business Standard article of Sept 16, 2015) the portable POS Machine that we see in Petrol Pumps at a subsidised cost of Rs. 1,000/- each (estimated total cost is Rs. 5,000) on the Store owner providing the following information : Name, PAN Card Copy, Address Proof, Bank A/c Number, Sales Tax/VAT Regn Number (if his turnover dictates his/her having such registration) .  This offer should be made available for the next 6 months after which the subsidised cost will be raised to Rs. 2,000/-.
8. This same offer should be made to all Grade I and Grade II  Restaurants/eating houses in all Cities of India, Tent Houses (i.e. arrange marriages),  all Sweet Shops (Halwais), various Professionals like Photographers, Newspaper Vendors, all Vendors on Railway Platforms, all  State Transport Bus Stands,  all Hospitals / Nursing Homes / Medicine Shops and suchlike.
9. Government,  at its own cost,  must ensure that such POS machines (in sufficient numbers) are installed at all revenue collection centres of the Government e.g. Municipal Taxes, Court Fees, Electricity Bills, Telephone Bills, all ST Bus stands and all Railway Stations, particularly the Stations in Rural and Semi-urban areas.
10. Assuming that there are another 12 million such eligible entities (this figure is a pure guess by me), the total number of POS machines to be provided works out to 24 million or 2.4 Crores.  A requirement of this size can easily bring down the cost of these machines to Rs. 3.000 to Rs. 3,500/-.  So in the worst case (cost of Rs. 3,500)  the subsidy that the PSU Banks and PSUs will have to bear is approx Rs. 6000 crores (Rs. 2500/- subsidy per POS M/c X 2.4 Crore M/cs to be supplied)
11. Govt must make sure that all these subsidised POS machines are of Public Sector Banks and use RUPAY Cards so that PSBs benefit from these transactions.
12. Where will the above subsidy come from ?  This subsidy should come from the CSR Funds of PSUs and PSBs which they are mandated to spend anyway.  Thus there will be no impact on their Business P & L because of this action.
13. Indeed, the government can also recommend to and request the Pvt Sector companies to join in this effort which will speed up the task and spread the support amount required to be borne by individual companies.
14. Parallelly a massive campaign has to be launched to issue RUPAY Cards  FREE to all PSU customers,  whether they ask for it or not so that customers will use them for their day to day transactions where they were earlier using Cash.  It has to be explained in repeated communications and through Mass and Electronic Media that this will relieve them of the need to withdraw huge amounts of Cash from their banks, will eliminate the problem of exact change and inform them that these cards are now being accepted at all and sundry retail outlets like the Kirana Store, the corner Baniya, medicine Stores and even the Sabziwala.
15. Another important component of this action is repeated and regular training of new customers, particularity in rural and semi-urban areas on “how to use these cards” , “how to protect their passwords”,  “why never to share their passwords even with their children or siblings” and “how to report suspicious withdrawals at the earliest”  etc.  This is a very important part of the campaign because if people face losses due to cheating and fraud from their accounts they will simply stop using cards and revert to cash as before.
16. As can be easily visualised,  the above steps will yield the following benefits :

a) The amount of cash / currency  in circulation will dramatically reduce.  As a result,  Black Money in Cash will also significantly reduce and bribe payments in cash will become that much more difficult.

b) Government and the banking system will capture the sales/turnover of various small and medium enterprises much more accurately leading to better tax collection and more accurate assessment of country’s GDP.

c) Banks will have hugely increased CASA since large amounts of transactions will only be transferring money from one account to the other,  instead of cash getting withdrawn from the banking system – as a result banks will have much greater amounts available for lending which will,  hopefully,  reduce interest rates further which in turn will have huge upside effect on fuelling economic activity.

These are first-cut thoughts.  Qualified persons in this area like Bankers and Officials of various Govt agencies connected with this issue can give a better shape to these proposals and take necessary action.