Demonetisation: Concerns on farm output minimal, but rural demand may feel the heat amid cash crunch

The demonetisation scheme has affected agriculture and linked activities not just in terms of affecting output at the margin, but also lowering potential income as this sector is almost fully cash driven

Madan Sabnavis December 22, 2016 10:55:34 IST
Demonetisation: Concerns on farm output minimal, but rural demand may feel the heat amid cash crunch

The impact of demonetisation on agriculture is an indirect one. There are two cropping seasons in India. The monsoon crop, which is kharif, was in the midst of harvesting while the winter crop, or rabi, was in the first stages of sowing when the announcement was made. A good monsoon ensured that the kharif crop across all commodities was good, while the moisture retention meant that the rabi crop would follow suit. The demonetisation exercise began on 8 November, which was at the confluence of these two phenomena and had implications for both the activities.

The kharif crop requires labour for harvesting and has to be supported by the logistics structures in the form of transportation and storage to the final selling point which is the mandi. As every link in this chain is almost entirely settled in cash, the absence of currency in the system has affected the overall post-harvest activity. Hence, while the harvest has been very good which will get reflected in the production numbers, the products have often been sold at a very low price thus affecting the incomes of farmers which in turn impacts spending power. The RBI did react to the situation once the impact was assessed and gave priority to the supply of cash to the rural areas with the limits being enhanced for these purposes. The problem was hence addressed to an extent.

Demonetisation Concerns on farm output minimal but rural demand may feel the heat amid cash crunch

Reuters

The rabi crop has gotten impacted to begin with due to the non-availability of currency to buy seeds and fertilizers. While the use of kisan cards is fairly satisfactory, a substantial part is still dealt with cash as the kharif income is used for purchase of seed for the second season. Second, the logistics support in rural India has come to a standstill as while the RBI intervention has led to an easier flow of cash to the farmers, the same has not happened for the support services. Transport operators in particular were affected. Third, employing labour for sowing has also been a challenge for crops like wheat, chana and mustard, which are the main rabi crops. This has raised some concern on the future prospects of the crop.

The area under cultivation under rabi crops is higher at 519 lakh hectares compared with 490 lakh hectares at the same point last year. For all the three main crops, wheat, oilseeds and pulses, area under cultivation this year so far till 16 December has been higher and would not under normal circumstances provoke concern. However the non-availability of currency for these transactions has raised some apprehension even though the final sowing numbers would be better than last year.

In particular wheat prospects have been monitored quite closely as it is expected that with the absence of rains in winter the progress of the crop will be affected. This in turn can affect the final output, which is a problem considering that private estimates have put the output for 2015-16 to be lower than 2014-15 thus leading to decline in stocks. The official numbers put 2015-16 output higher by 7 million tonnes though procurement was 5 million tonnes lower, which is unusual. This is one reason as to why the government has withdrawn the duty on import of wheat so that overall stocks are augmented.

The farm sector was to witness a turnaround this year on account of a good monsoon with growth of around 5 percent expected after two years of drought. The story had been progressing according to plan but the distortion caused by demonetisation, which meant the drying up of cash in the rural economy, has cast a cloud over this optimal situation. While overall growth will definitely continue to be high at probably between 4-5 percent which is only marginally lower than expectation, the lower value of the crop due to lower prices for kharif output in case of pulses and horticulture would impact the income of farmers.

It may also be pointed out that it was expected that the rural spending contribution to growth would be significant after two years of negative growth. Now, the cash crunch has compounded the problem as it has resulted in lower realisations for farmers as they have received lower prices on account of distress sale at the mandis. The implication is that there will be a hiatus between rural and urban spending and the lag can be one or two quarters.

The demonetisation scheme has affected agriculture and linked activities not just in terms of affecting output at the margin, but also lowering potential income as this sector is almost fully cash driven. Until such time that the situation normalises, which will take between 3-6 months before cash is freely available, the farmers would be under stress. This will show not just in consumption demand for industrial goods but also linked activity like transport, packing, labour used in planting and harvesting. There would hence be a multiplier effect on income and consumption.

The writer is chief economist, CARE Ratings. Views are personal.

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