India's cash drought
Money is meant to circulate. And its circulation is what we call the economy. On November 8, Prime Minister Narendra Modi, in an unexpected televised speech, put a curb on this circulation. The government demonetised currency notes of rupees 500 and 1,000 denominations. These notes accounted for 86 per cent of the currency notes in circulation. In a country where 98 per cent of retail transactions are made in cash, it was like a cardiac arrest for the system.
Its impacts on the rural economy are the most worrying, especially because it is uncertain when the economy will be back to normal. There is a certain seasonality to the rural economy. Demonetisation happened at the time of maximum cash transactions. Farmers were harvesting and selling a bumper kharif crop, after two consecutive drought years. They were also preparing for the rabi crop, the all-important crop to earn that precious cash that would sustain them till October next year.
According to farmers’ own estimate, during October-November they conduct close to 85 per cent of their cash transactions in a year. Electronic payments account for just 2.5 per cent of all retail transactions in the rural economy. The informal sector accounts for 93 per cent of the total employment. This is where demonetisation proved to be a disruption of unheard proportion (see ‘India’s cash drought’).
Take Tejpal Shaini, a farmer of Pabsara village in Haryana’s Sonipat district. After harvesting paddy in October, he took the first step towards prosperity by deciding to go for vegetable crops for quick earnings. He took up fenugreek and coriander in nearly a hectare of land each. “Winter crop is my insurance against debt,” he says. Shaini took a loan of Rs 3 lakh for agriculture. He would have repaid the loan with the earning from the rabi crop, after keeping aside some money for the education of his grandchildren.
But immediately after demonetisation the vegetable prices crashed. Usually, during this time vegetable prices are low due to oversupply. But in the absence of cash, the demand also decreased drastically. Delhi’s wholesale markets reported 50 per cent dip in sale during November. “Leave the profit, I will not recover the cost,” Shaini says, adding that he is unable to pay the labourers, who are still working in his fields. For fenugreek, Shaini spent Rs 12,000 on seeds, Rs 2,000 on medicine and pesticides, and Rs 6,000 to prepare the farm for cultivation. Nine labourers work on his farm, each costing him Rs 220 a day. To harvest his one-hectare fenugreek, these labourers have to work at least 15 days. This means Shaini has to pay them Rs 29,000. To transport the harvest to the Azadpur wholesale vegetable market in Delhi, he spends Rs 2 per kg of fenugreek. The commission agent in the market takes Rs 20 for every 50 kg of fenugreek. For his entire crop the investment comes to about Rs 61,000, but due to the price dip he has earned just Rs 36,000. This is almost a loss of 59 per cent. “Farmers have been punished for no mistake,” he says.
Balram Singh, vice-chancellor of Jodhpur Agriculture University, says, “Farmers, especially those cultivating vegetables, are facing a crisis. They are being exploited by everyone because they deal in perishable items.” Farmers were told to either take old notes or return empty-handed. “Exchanging the old notes is quite a challenging task in rural areas because the cash crisis there is worse than in urban areas,” Singh says.
By the time the government issued the new currency of 2,000 denomination, another problem unfolded. Ajit Singh, a farmer in Dichaon Kalan in Delhi who cultivates cauliflower, explains why the new currency notes are of no use to him. “Even if some buyers come to the market, we cannot give change without the Rs 500 and Rs 1,000 notes. So, with money also we end up doing no business,” he says. Bablu Chauhan of Sonipat says, “Bigger notes have helped bigger traders, while squeezing the small ones out of business.”
Demonetisation has affected everybody in the chain, points out Mukesh Pradhan, who trades in vegetables in Azadpur market. The informal moneylending that sustains the vegetable market has collapsed. Pradhan gives loans of Rs 40-50 lakh to a few farmers when they begin sowing vegetables. This is on the condition that they will sell their products at the spot allotted to him in the market. For using this space he takes 7 per cent of the income from vegetable farmers. Usually, farmers return the money by November. However, not a single farmer has repaid the money this year. “It is time of uncertainty. If farmers are not able to sell even Rs 500 worth of vegetables every day, how will they return the money?”
In Maharashtra that is crawling out of a crippling drought this year, demonetisation is being termed a “monetary drought”. Arvind Tagde of Kundali village in Nagpur district wanted to cultivate wheat to ensure food security for his family but could not do so because he did not have enough cash to buy seeds and fertilisers. In desperation, he bought the produce of an orange plantation on a credit of Rs 32,000 and spent another Rs 8,000 on transportation and other expenses. “My market reading was that this year the orange production would be less, thus, the price would be high,” he says. But due to demonetisation, the demand of oranges decreased significantly.
In distress, he sold his total harvest of oranges for Rs 25,000. “It is a loss of around 40 per cent,” he says. The Karamana market in Nagpur, one of Asia’s largest orange markets, has reported just over 50 per cent trade at the peak of the business season. Tagde is staring at a long-term financial distress that almost threatens his family’s food security. Since he did not cultivate wheat, he does not have foodgrain in stock to take care of his family’s daily needs. He has to buy it from the market. But money is in short supply. Can he go back to wheat cultivation now? What adds to his cup of woes is the collapse of cooperative banks, the usual source of loans for farmers like him. Cooperative banks are not in operation due to demonetisation.
In Maharashtra, about 28 per cent of the farmers get credit from cooperative banks. It is almost double of the national average. The Reserve Bank of India (RBI) has debarred cooperative banks from the currency exchange business. They have more than 10 million customers, especially in rural areas, with a deposit of Rs 1.27 lakh crore. At present, the Supreme Court is hearing a case demanding that the government should relax RBI norms for cooperative banks. On December 3 during a hearing, the court was informed that 371 district cooperative banks had shut down after demonetisation.
After a week of demonetisation, the government woke up to the problems farmers were facing in buying the seeds of winter crops. It allowed use of old notes for this. But it is not helping. Take the example of the usually busy seed sale counter at Meerut’s Sardar Vallabhbhai Patel University of Agriculture and Technology. By the first week of December, the seed centre did not receive any official order to allow farmers to use old notes for buying seeds. It still decided to receive old notes. Now banks are not allowing the university to deposit the old notes. Officials say that banks don’t have the government directive.
In 2014-15, the seed centre sold 110 tonnes of wheat seeds. The sale has come down to just 20 tonnes this year. “It is possible that farmers are using their own seeds. Those are not that productive and may bring down production by 12-17 per cent,” says Ashok Kumar, research director at the university.
Collapse of cottage industry
Demonetisation has also hit India’s cottage and small industries around agriculture. These industries process final products around this time. In Uttar Pradesh, the jaggery industry is on the verge of collapse. The state has the maximum number of traditional jaggery units in the country: of the total 40,000 units, it has 23,000. In Uttar Pradesh, these units employ close to half a million people. The jaggery business is entirely cash-based and mostly run by small and marginal farmers.
In western Uttar Pradesh, many jaggery units have stopped production. Their owners are not able to buy sugarcane from farmers because of the drop in the sale of jaggery. As these units closed, the workers also lost job. Though they get 15-20 per cent less, farmers prefer to sell sugarcane to jaggery units because they get money instantly, while sugar factories take months, even years, to clear dues. After a month of old notes being declared illegal, 15-20 big jaggery wholesale markets have stopped trading. These include Muzaffarnagar, the country’s biggest jaggery market. India’s second biggest jaggery market, Anakapalli in Visakhapatnam, has also closed down. Traders there say this has happened for the first time in living memory.
Good monsoon negated
This disruption is showing up in terms of India’s agricultural performance. When the Union Ministry of Agriculture and Farmers Welfare reassured the country on December 2 that no impact is visible on the ground, especially regarding the sowing of the rabi crops, it did not lie but misled the public.
The ministry compared the sowing in the current rabi season after a good monsoon with the previous year’s sowing that followed a severe drought. The sowing pace is, therefore, obviously better.
The current sowing trend, which is at its fag end, is poorer when compared to the rabi-sowing season of 2013-14 after the last normal monsoon (see ‘Good monsoon...’). That year India reported the highest production of foodgrains since Independence. Since then, grains production has declined due to consecutive deficient monsoon causing severe drought.
This is where demonetisation is going to wash away the benefits of a normal monsoon after three years. Demonetisation happened when farmers were in the middle of selling the kharif produce and preparing for the rabi sowing. The acreage has sharply reduced when compared to normal monsoon years.
“The sowing of rabi crops as on November 18 was 11.5 per cent lower than the average of the past five years. We should not compare the area sown this year with last year’s as the residual moisture is much better than last year due to good monsoon in most parts of the country,” says Siraj Hussain, former secretary, Union Ministry of Agriculture and Farmers Welfare (see ‘Demonetisation to hit small farmers’).
The current year is also important from the point of India’s food security. The rabi season is primarily known for wheat and pulses. This season has been seeing extreme weather for the past three years. This has reduced the production of wheat and pulses. The shortage of pulses, in turn, has shot up the retail prices. This attracted farmers to grow more pulse crops in the kharif season, resulting in record sowing and production. The acreage of pulses shot up by more than 30 per cent.
The country was set to have another season of record pulses production but demonetaisation came as a dampener. In the rabi season the acreage of pulses has reduced. In case of gram it has decreased by about 10 per cent in comparison to a normal year.
The price of wheat is also rising. Since October, it has gone up by 25-30 per cent. In the past one month the price of wheat flour rose from Rs 190 per tonne to Rs 240. The forecast of a warm winter is another bad news since wheat requires low temperature to flower. Since the sowing this year has been low, the government has removed import duty on wheat to ensure that the supply remains sufficient.
Firms making fast-moving consumer goods had been expecting a rise in demand in the wake of good monsoon after two years of drought. But demonetisation has slowed the demand. Rural areas have only one-fourth of the ATMs in the country. Cooperative banks, which are closer to the rural population, have almost shut down.
Agriculture scientist M S Swaminathan also thinks that the timing of demonetisation is proving worse for farmers. It has created difficulties in getting credit for seeds, fertilisers and energy for rabi crops. State governments should immediately prepare a demonetisation management package for agriculture and streamline credit access and delivery mechanism, he says.
On December 7, RBI lowered its gross domestic product forecast for 2016-17 from 7.6 per cent to 7.1. The reason, probably, is the slowdown expected in agriculture in the coming months.
Euphoria turns into depression
Within a week labourers were forced to either sit idle at home or work on credit
The RHETORIC on black money has now shifted to cashless society and that hardly impresses farmers because rural market integration will take years. The conflicting position on demonetisation is primarily driven by emotion and experience. Poor sections of society, including farmers and farm labourers, harbour a strong belief that accumulation of black money is the result of their exploitation by traders, government officials and professionals like doctors and lawyers. But the initial euphoria died down after one week because of various reasons.
The daily wage earners in rural non-farm employment, who constitute nearly 30 per cent of the rural workforce, suffered due to the closure of the unorganised sector in urban areas, while farm labourer suffered due to cash crunch at farmers' end. They were forced to either sit idle at home or work on credit. The markets in rural and small towns are deserted; the only busy places are banks where the police resorted to lathi charge at several places.
The government produced rabi-sowing statistics, claiming that sowing had increased despite demonetisation. It hardly matches with ground situation even if it is true. After one month the farmers are a depressed lot because money supply is not normal in villages and there are hardly any tangible results of this exercise.
Panwar is a member of the Uttar Pradesh State Planning Commission
Demonetisation to hit small farmers
Government decision to ban rural cooperative banks from accepting old notes means small and marginal farmers, who own 73 per cent of cooperative bank accounts, are left cashless
On November 8, 2016, the Union government demonetised Rs 500 and Rs 1,000 notes. Six days later, the Reserve Bank of India (RBI) issued a circular barring rural cooperative banks from accepting demonetised notes, even for deposits in banks accounts of its own customers. Cooperative banks in urban regions were, however, exempted.
The November 14 decision will adversely affect small and marginal farmers, who constituted 73 per cent of Primary Agricultural Credit Societies’ (PACS) memberships in 2014-15. PACS are cooperative credit institutions that work at the grassroots level. With a presence in 94.32 per cent villages, PACS are the main source of institutional finance for small and marginal farmers in the country.
At present, if a farmer has sold his kharif crop and received the payment in Rs 500 or Rs 1,000 notes, he cannot exchange or deposit the same in his cooperative bank account. He cannot even repay his loan drawn from his PACS on his Kisan Credit Cards (KCC). He cannot even buy seeds or fertilisers. More importantly, the agricultural labour cannot be paid wages. The only option available to him is to open a new bank account with a commercial bank or Regional Rural Bank. With bank staff busy in exchanging or issuing new currency, it is not easy for farmers to open new accounts in most places.
Rabi sowing in many states, including Uttar Pradesh and Bihar, should have been in full swing by now. The sowing of rabi crops this year, as on December 2, 2016, was just 0.27 per cent lower than five years’ average, but wheat sowing was a good 8.25 per cent lower than the normal area under wheat.
On November 21, 2016, the government allowed the use of old currency for purchasing seeds from government stores, but in many states, a large number of farmers purchased seed and fertilisers from PACS, with whom they have a long association. With a logjam on cooperative credit, many small farmers would have borrowed money from moneylenders or from owners of private seed stores. It is feared that many farmers would have also used seeds saved from last year. Some farmers may also apply lower doses of fertilisers. This will impact farm productivity. The country cannot afford low production of wheat this year. The estimated stock in the central pool on April 1, 2016, was 7.63 million tonnes, which is just above the buffer norm of 7.46 million tonnes. Good production and procurement of wheat are hence essential for the food security of the country.
There is an immediate need to provide cash to district cooperative banks so that PACS can become functional again. At present, PACS can only withdraw Rs 24,000 per week from district cooperative banks. With thousands of members in PACS, it is just not possible for them to service their farmer members for rabi operations. Moreover there is no logic behind treating rural and urban cooperative sectors differently. With 379 out of 380 district cooperative banks already on core banking system, it should be possible to monitor use of accounts with cooperatives for money laundering.
Demonetisation is not all bad news. It can benefit small and marginal farmers in the long run. If all cooperative banks were to issue plastic cards to KCC owners, the banking transactions can become much smoother. As per the 2016 Sarangi Committee report, set up by the Ministry of Agriculture, cooperative banks have issued plastic cards to less than 1 per cent of the eligible KCC account holders. The government had directed cooperative banks to provide plastic cards to all account holders by December 31, 2016. Agricultural Produce Market Committees can be asked to make all payments exceeding Rs 20,000 directly to bank accounts of farmers. This will reduce exploitation by commission agents and ensure prompt payment to farmers. The real benefit to small farmers will come from reforms in leasing laws, on which NITI Aayog has been working. It is also the time for a hard push to e-National Agriculture Market.
Since agriculture is a state subject, building consensus with state governments is necessary. The Bharatiya Janata Party-ruled states can show the way by implementing policies that can reduce the use of cash in the agriculture sector to some extent. This can be a game changer in the long run.
Hussain is former secretary, Ministry of Agriculture and Farmers Welfare, Government of India, and currently a visiting senior fellow at ICRIER
Doubling income is now a distant dream
The promised long-term benefits of demonetisation are not clear
The impact of demonetisation on the rural economy is huge. Initially, the majority of the people supported the move because it was supposed to end the black economy. But as the government changes the narrative and the cash crunch starts to hurt, the support is wavering. Food inflation is down because consumers are buying less. Demand can be seen in two ways. One is deferred demand where consumers hold purchases of items like clothes due to financial crunch. But consumers not buying as many fruits and vegetables as they would normally buy is demand lost for farmers. They are paying the price every day. Prices of fruits and vegetables have crashed 25 per cent. Rabi season loan offtake is also impacted.
Additionally, the Reserve Bank of India (RBI), in its misplaced wisdom, notified that RBI-licensed cooperative banks will not accept RBI-issued currency bills. About 60 million farmers, who fulfilled the "know your customer" norms and availed themselves of loans under schemes such as Kisan Credit Cards, are unable to repay the loans simply because the banks are refusing to take back the RBI-issued currency.
"Doubling farmer income" seems a distant dream now. The prime minister appealed to the people to bear the "short-term pain". But the consequences to farmers are long-term. The government is unable to illuminate on the promised long-term benefits. It's not even explaining the term "long-term".
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