Out of Money Experience Impact on Farmers

The distribution channels for agricultural produce are also heavily dependent upon cash transactions. Digital India can help. Increasing penetration of banks into rural area, making people digitally literate, encouraging them to save in banks and other FIs could be the first step towards a true Digital India. SURBHI ARORA writes

Out of Money Experience Impact on Farmers

The only exercise I have done in the past ten days is running from ATM to ATM and believe me, it has been an out of money experience! Sadly it did not burn any calories though. However, it made me wonder that if I, in a place like NCR, am facing such an issue, what might the people in rural areas be facing?

The main mode of transaction in agriculture sector is ‘CASH’, which contributes to 15 percent of the India’s total output. The distribution channels for agricultural produce are also heavily dependent upon cash transactions. This particular time of the year is for harvesting of kharif and sowing of rabi crop.

Production for the next fiscal year would reduce if the sowed rabi crop gets reduced due to shortage in buying seeds on time to exploit the adequate soil moisture. Yields will also decrease as a result of late sowing or exposure to rough weather or lack of sufficient or timely application of fertilizers, pesticides, etc.

Any break in supply chains adversely affects the farmers’ sales, leading to increased wastage of perishables, lowering of revenues that show up as trade dues, and when deposited in the bank account gives limited access. In states like Punjab, Uttar Pradesh, Odisha, Maharashtra, Gujarat and Kerala financing is majorly done through cooperative banks which were barred from exchange deposit of demonetized currency. This has impacted the borrowing and financing operations of not only small farmers but also the larger ones. The input side would also be impacted as many payments for purchase of seeds, fertilizers, implements and tools, are made in cash.

There is an increase in the wheat prices due to low stocks and anticipated shortfall in the current fiscal year. During the latest e-auction of stocks by the Food Corporation of India’s (FCI) on November 17, wheat was sold at prices ranging from Rs 2,338-Rs 2,379 per quintal. According to the report, the prices on November 17 were higher than the Rs 1,943-Rs 1,959 and Rs 2,124-Rs 2,129 rates of previous weekly e-auctions on November 11 and November 3.

The latest Ministry of Agriculture data shows that wheat was sown in 79.40 million hectares (mh) land in the current rabi season. This was slightly higher than the 78.83 mh covered during the same period last year. The demonetization would not affect the sowing as farmers generally use a portion of grain retained from the last year’s crop as seed. However, farmers are worried about having enough cash for buying other inputs and paying the labourers.

In 2015-16, fruits and vegetables accounted for 61 percent of agriculture’s gross value added (GVA). However, since the announcement of demonetization, their sales have dropped significantly ranging from 25 percent to 50 percent depending on the regions. Since at this moment of time, the purchasing power is less in the hands of the people, it is keeping the prices suppressed. however, eventually supply shortages are bound to occur and cause inflationary pressures in the economy.

Seasonal labour is reported to be unpaid as farmers do not have cash and they have started returning to their native states mainly in Uttar Pradesh and Bihar. Workers of crops like rubber, tea, jute and cardamom are going unpaid. This would result in labour shortage and a spurt in wages. Raw jute trade is at a standstill since paucity of funds affects procurement and delivery by traders. Projections of scarcity have appeared with appeals for official procurement support. Cotton is witnessing havoc as daily arrivals have plunged to 30,000-40,000 bales against the usual 1.5-2 lakh bales at this time of the year as per reports and prices have soared 9 percent in a week, pushing up global prices in turn.

There are concerns about the Indian economy going into a recession since consumption has been hit the hardest. Already the figures of revised GDP estimates have started coming in. Ambit Capital, a Mumbai-based equity research firm, has officially estimated that the demonetization-driven cash crunch will result in GDP growth crashing by 0.5 percent in the second half of financial year 2016-17. They estimate that during the October to December quarter, the GDP growth may contract, thus showing negative growth. They are hopeful that a strong formalization of the informal economy will ensue through 2017 until 2019 but this disruption could also crimp GDP growth in 2017-18 to 5.8 percent from their earlier estimate of 7.3 percent.

In the interest of the farmers, certain steps have also been taken by the government:

  • Permission to farmers to withdraw up to Rs. 25,000 a week
  • Agri-traders registered with marketing committees can withdraw up to Rs 50,000.
  • Extension in payment of crop insurance premium.

These steps might provide cushioning effect to some extent, but a lot needs to be done to bring the unorganized sector into the mainstream. Increasing penetration of banks in rural area, making people digitally literate, encouraging them to save in banks and other FIs could be the first step towards a true Digital India.

According to a December 2015 Reserve Bank of India report on ‘Financial Inclusion in India’, each rural and semi-urban bank branch serves 12,863 people compared to an urban and metropolitan branch which serves just 5,351 people. The spread of ATMs too is skewed in favour of urban centres. Delhi, for instance, has 9,070 ATMs, more than Rajasthan, the largest state in terms of size.

The RBI report suggests that between 2001 and 2015, the number of bank branches in urban and metropolitan centres doubled from 20,713 to 43,716. In rural and semi-urban centres, it has increased, but not at such pace. During this period, the number of branches in rural and semi-urban centres has risen from about 44,905 to 82,358. In 2015, there were 7.8 branches for one lakh people in rural India, but 18.7 branches in urban India. It is to be understood that the government is intending to formalize the unorganized sector and bring it under the formal banking system in their own interests.

The worst damage of demonetization is likely to be on those people, who are ill informed and gullible or impressionable. It is the responsibility of everyone who means well for the rural poor to warn them of these pitfalls. We all should look at the bigger picture which will definitely fetch results in the long run.

(Author is Senior Vice President – Research & Media at AFII CORP, views expressed are personal)

The Changing Face of Rural India