1. Demonetisation will have little impact on agricultural growth, but will hit farmers hard

Demonetisation will have little impact on agricultural growth, but will hit farmers hard

It is more than a month since the prime minister Narendra Modi announced the partial demonetisation drive, and we are now into the last lap.

Published: December 29, 2016 6:41 AM
Demonetisation, Indian Farmers, kharif harvest, agricultural sector, ICAR It is more than a month since the prime minister Narendra Modi announced the partial demonetisation drive, and we are now into the last lap. (Source: IE)

It is more than a month since the prime minister Narendra Modi announced the partial demonetisation drive, and we are now into the last lap. The drastic move was announced at a crucial stage for agricultural operations. The kharif harvest was about to reach the markets and the rabi sowing had just begun. There were genuine apprehensions about its impact on one of the largest sectors that employs about 50% of the population. More so, since after two years of sluggish growth, agriculture had just made a turnaround with a growth forecast of at least 4% in 2016-17, even by conservative estimates.

What has been the effect on agriculture so far and what is the effect likely to be in future? Is the growth going to be severely dented? Are farmers going to be in distress? The answer is both yes and no. The agricultural growth is unlikely to be affected by demonetisation. However, the farmers are likely to be adversely affected, if not distressed.
This is because of the way income in agricultural sector is computed, wherein production is multiplied by wholesale prices and the costs of inputs are deducted, to derive the gross value added (GVA). To this the value of irrigation services is added to compute the total income. Although food prices have shown a downward trend lately, the quantum of production is robust to compensate for this.

The kharif foodgrain production increased from 124 million tons in 2015-16 to 135 million tons in 2016-17—an impressive increase of 9%. The increase in production of pulses is a huge 57%! However, food prices have been showing a sharp decline. The overall food inflation, based on consumer price index (CPI), has come down from 6% in December 2015 to 2% in November this year. The corresponding decline in case of pulses is whopping—from a high of 46% to 0.2%—reflecting a much faster decline in the price of pulses. Despite this sharp downward movement in food prices, the overall growth in the sector is very likely to be in the range of 4.5 to 5%, largely due to the increases in kharif production. Also, the rabi production is likely to be very high because sowing has been very brisk so far.
Rabi sowing normally starts in the last week of October and extends till December.

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As per the latest estimates on December 23, rabi sowing was complete on 87% of the target area. The current area sown is 6% more than the area sown last year around the same time. The area under wheat, pulses and oilseeds has increased by 7%, 10% and 11%, respectively. This is an impressive increase, considering that the sowing had just begun when the demonetisation drive was announced. There were apprehensions about farmers’ ability to purchase seeds and other inputs. It now appears the demonetisation has had little impact on rabi sowing. The informal institutional structures and the inter-linked markets in rural India, where the suppliers advance inputs on credit and also act as lenders appear to have cushioned the impact of demonetisation to a large extent.

The government’s initiatives such as allowing farmers to buy seeds using old notes from the central and state-owned seed companies, as well as from ICAR and central varsities; instructing fertiliser companies to sell soil nutrients on credit; allowing an additional two months to repay crop loans due in November-December period, have all perhaps helped this process. As a result of all these factors, the rabi foodgrain output is likely to be much higher and could be 7% higher than 2015-16, if the targets are met. Therefore, the overall agricultural growth in 2016-17 could be much higher despite a slowdown in food prices.

However, the increased production and the expected higher growth are unlikely to translate into improvement in farmers’ incomes. Paradoxically, the increase in production resulted in a worsening of farmers’ situation. The large increase in production resulted in a drop in prices and the public procurement of crops, like pulses, was not active enough. Even market transactions were sluggish after demonetisation. There are reports of a steep decline in transactions at various states APMC’s, in some cases declining upto 70%, in the aftermath of demonetisation. Farmers faced a lot of hardship in transporting the produce to the market, since services such as loading and unloading require labour which is cash-intensive. Decline in demand due to cash constraint has further aggravated these price declines. There have been several instances of market price falling below the minimum support price (MSP) in various parts of the country.

There have been 785 and 209 such instances in case of moong and arhar, respectively, in the first week of December. The situation is worse for perishables like fruits and vegetables. The absence of storage and processing facilities for these commodities make these commodities highly vulnerable. The liquidity crunch has pulled down the demand, further aggravating the plight of these farmers. There are reports of price of vegetables dropping by almost 60% across wholesale markets. The CPI inflation of vegetables has recorded a steep decline of 10% as per the latest estimates.

The cash crunch has reportedly affected onion trade, poultry sector and there are also reports of large scale distress sales by orange farmers in Vidarbha region of Maharashtra. Therefore, demonetisation is unlikely to affect agricultural growth but it is likely to hit the farmers badly, unless the public procurement of pulses improves and distress sales of perishables are addressed.

CSC Shekhar
The author is professor, Institute of Economic Growth, Delhi University. Email: csekhar@iegindia.org.

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