Demonetisation: Government should not vilify cash; should replenish supply so that growth picks up

By: | Updated: December 10, 2016 5:30 AM

From a surgical strike on black money, prime minister Narendra Modi has touted demonetisation of high-value currency notes as a vehicle for transition to a cashless economy, but a visit to Sirsi in Karnataka’s Uttara Kannada district shows the vital role cash plays in rural life despite the spread of banking.

Cooperative Sale Society established in 1923 has over 25,000 members. It is one of two big commission agents at the Sirsi market yard, known for wholesale trading in betel-nut or supari. (Reuters)Cooperative Sale Society established in 1923 has over 25,000 members. It is one of two big commission agents at the Sirsi market yard, known for wholesale trading in betel-nut or supari.
(Reuters)

From a surgical strike on black money, prime minister Narendra Modi has touted demonetisation of high-value currency notes as a vehicle for transition to a cashless economy, but a visit to Sirsi in Karnataka’s Uttara Kannada district shows the vital role cash plays in rural life despite the spread of banking. Shifting to cheques and e-payments will need upgrades in banking infrastructure, cheap and widespread Internet connectivity and a huge change in mindset. With all that, going cashless may not be practical for those doing a few, low-value transactions.

Sirsi is unique in the sense that cooperatives are well-entrenched here, unlike elsewhere, where special interest groups have run them aground. The Totgars’

Cooperative Sale Society established in 1923 has over 25,000 members. It is one of two big commission agents at the Sirsi market yard, known for wholesale trading in betel-nut or supari.

“Actually the farmers’ problem is with marketing. The government thinks its job is done once loan is given. If marketing is done, there is no need for any other thing,” says Raveesh Hegde, general manager of the cooperative and former sales executive with a soft drinks MNC.

Though the yard has about 250 commission agents, Totgars’ accounts for about half of the 3 lakh quintals of betel-nut traded. The Taluka Agricultural Produce Marketing Cooperative Society is another significant player. Totgars’ is not only a commission agent, it also does trading as a price-lifting strategy. With prices volatile, it runs the risk of incurring losses in its trading operations, which it covers by selling higher value scented and raw supari in retail packages. The cooperative has a warehousing capacity 60,000 kg, which it rents out to farmers so they can sell in a staggered manner as prices rise after the harvest season.

It is the exceptional farmer in Sirsi who is not a member of a cooperative. Membership has many benefits. Totgars’ for instance give loans up to 85% of the value of stock pledged. It provides production loans based on the average of three years of sales to the society and against a charge on property. A portion of the trading profits are distributed to members as bonus in proportion to quantity sold through the cooperative. A part of the profit is spent on a hospital, where members get a discount. Customers get the benefit of purchase efficiencies when they buy agri-inputs, irrigation equipment and groceries through its retail stores.

Sripad Hedge of Sirsi’s Mattigatta village says the cooperatives supply all his needs. He is a member of the Taluka cooperative as well as of the village-level Mundagaramane primary agricultural cooperative society. “I do not take loans from moneylenders,” he says. Moneylenders often double up as traders. Borrowing from them creates an obligation to sell own produce as well. Farmers end up paying high rates of interest and getting low value for their harvest. Sirsi’s cooperatives insulate them from that double blow.

Sripad Hegde has 25 quintals of betel-nut. He does not expect prices to rise to the peak of Rs 40,000 seen in 2014 but he will not sell at rates now ruling at less than half. He has no compulsion.

Karnataka initiated pioneering agricultural marketing reforms in 2014 and the Sirsi yard was among the first to go electronic despite initial resistance by traders and commission agents. Farmers can sell lots from a few kg to a few quintals. Traders from across the state and elsewhere can bid for them. (But they will need a local agent to inspect for quality as the lots are not standardised). All they need is a licence which costs R2,000 for 10 years. Cartelisation, which was the norm when trading was localised, has been virtually eliminated. Price discovery is transparent and farmers can elect to accept or reject bids within half an hour. While trading is electronic in 152 of the state’s 158 regulated mandis, payments are not online in most of them. That is not the case in Sirsi where all the farmers have accounts with the cooperatives. If they have bank accounts, it is for subsidies which the government disburses.

A little past 2 pm on December 2, Ramnath Hegde got a message on his mobile phone. It was a quote of Rs 17,399 for a quintal of chali or white, shelled betel-nut. The farmer from Uratota village in Sirsi taluka of Karnataka’s Uttara Kannada district had put seven quintals on auction. Hegde grows betel-nut on 1.5 acres and his annual production is about 25 quintals. The lot offered for sale was stock held from March.

One of the unintended consequences of the demonetisation of high value currency notes is the fall in prices of agricultural produce. The disruption in logistics caused by cash scarcity has depressed prices. On 8 November, before demonetisation was announced, the modal price for chali supari was Rs 19,882 a quintal. That for red or rashi supari was Rs 25,565. Following demonetisation, there was no trading till November 13. Trading has been thin thereafter. Farmers who should be at the mandis are standing in cash-withdrawal queues. With few sellers and fewer buyers, the middle price for chali supari on December 2 was Rs 18,472, higher than the quote Hegde got but lower than his expectation and the price prevailing before the shock.

Sirsi shows why cash is an essential lubricant for the rural economy and the limitation of banking in the setting. Once the cooperatives auction the produce, the proceeds are credited to farmers’ accounts. They can take out the money with two-way debit/credit cards, used to withdraw loan amounts as well. The cooperatives have their own ATMs. They are so dug in that private banks have been unable to make a dent, says Guruprasad, secretary of the Byadgi agricultural produce marketing committee. Totgars’ used to disburse R60 lakh a day, says Raveesh Hedge. Now, it has trickled to R2 lakh a day. Small amounts are rationed for essentials—groceries and medicines.

Primary agricultural cooperatives are faring no better. One such PAC serves the Harugara group of villages. It has 924 members. It pools the produce of its members and sells through Totgars’ with which it has an account. The combined proceeds are then distributed into individual accounts. Before demonetisation, it used to disburse R15 lakh in cash every week, its secretary G R Bhat said. Now, it can give no more than Rs 50,000. Farmers have to travel 10 km away to Sirsi to withdraw more cash. The smaller Kumta market yard for raw betel-nut, 70 km from Sirsi, opened for trading on December 2. Volume that day was 151 quintals, down from 395 quintals the same day a year ago. Trading was suspended on November 10, as commission agents refused to operate without cash.

The rural part of the economy is not ready to go cashless. Instead of vilifying cash, the government must find ways to replenish supply so agricultural growth can pick up speed.

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