How Does India Become Cashless?

Mainstream media was puzzled about a surge of physical cash with the public. The likes of which have not been seen since 2011 - a time of very high inflation. It seems the amount of currency with public has shown an almost 50% increase in 2015 - 16. Even though the RBI has hitherto maintained a position of net negative liquidity position with Banks. Specifically when it has been a year marked by its exact opposite - low inflation ! And furthermore sectors which are known to normally soak up cash like a sponge viz. retail, real estate, gold & jewellery etc, shown less than buoyant growth as compared to last year. It is an odd situation. Economists are chasing their tails trying to explain the phenomenon. And there are a slew of them from various quarters. And no consensus as such. An appealing and explanation was provided by the RBI Governor - elections in 4 State and 1 U.T! Which necessitates being awash in cash for obvious reasons, though not necessarily for the right ones ! And then there are some twists to the tale too. ATM withdrawals increased slightly,whilst average debit card transactions declined ! That sounds logical. So maybe people shelled out more cash. And did not use their card. To keep out of the tax net possibly! Also, since you get eight ATM withdrawals for free - you push for the most buck for your ATM punch ! “A Kitna Deti hai” moment for the value conscious ATM consumer! Paradoxically credit card transaction value doubled in last few years! Why is this so? Like for cheques, there are zero 'transaction costs' to the customer to make moves into hard cash. And coupled with "high compliance and administrative cost" for transparency in our day to day economic life . The inevitable is bound to happen - reliance on cash. And a substantial shadow economy estimated at 70 % of GDP (2013)! However,there could be much deeper structural and cultural reasons; (1) I would venture to say that the total 'money stock' in a predominantly 90 % cash economy like ours is generally indeterminate. Therefore when some of that comes under the surveillance radar of tax authorities or into the formal financial system for the very first time say via a surge in deposits into newly opened 200 million JDY accounts, sundry PO accounts to Post Office Bank accounts or new accounts in newly licensed Payment & Universal Banks. This makes for 'double counting' in M1, M2+ time and crafting of monetary policy trickier. . (2) With e.money uptake viz. prepaid/mobile wallets. The coming festival of lights could again see spike in currency with public. That would be conventional wisdom - perhaps more withdrawals from ATM to 'load up' the prepaid /wallet for redemption across a merchant network base. After all 40% of wallet popularity is in Tier 1 &2 cities where 'cash is king'. That can however change if Banks incentivise and encourage that the wallet be now directly loaded up from accounts and debit card. But many Banks are not encouraging their customers to do so with popular third-party wallets. Thus possibly styling the growth of wallets. The third party wallet cos, which include Telco's, have a much larger active base than the banks. Estimated to be 150 million plus. But Banks still prefer their own in-house prepaid card and wallets! The more the wallet is loaded up directly from the bank account or debit card via net banking,IMPS.etc. And more redemption is electronic. Less currency should be in circulation. On the other hand use of credit card (preferred option for mobile wallets) and cash from outside the Banking system to load up a wallet leads to an spike in other broad money indicators. Which when used in the formal measurable economy leads to an uptick in velocity. (3) One could also argue that the "stock" of "money under the mattresses" already circulating from "mattress to mattress" in exchange for goods and services in informal and formal economy. Does not get reflected in inflation - too much money chasing too few goods. This is the shadow economy at work. Or, flip side, inflation not explainable by money supply numbers, may be attributed to this shadow economy, money - stock- on- the- move (velocity). Lastly, I am going to use a term - 'technological deflation' - to explain the urban spend. Which is where online consumers clearly "get more, for less". Specially during festive season from Oct to Dec. Much of it CoD. But trying to match urban spending uptick to published GMVs of our favorite online e.marketplaces may give a false positive. In view of the discounts, cash backs, free offers at hand. This systemmic problem can be solved. If the prepaid card networks, wallet & UPI ecosystem - both Banks & 3rd party, play their roles. And B2C marketplaces guys get their payments leg electronfied. There ought be less of a mad rush to cash in time to come.