02 November 2017 Business Demo Effect

Cascading Misery

The domino-like latecomer effects of demonetisation, from farm to dinner table
Demand Crisis
Farmers found dumping onions in protest better than trying to sell it

The BJP’s unprecedented success in the Uttar Pradesh election, coming a few months after PM Narendra Modi anounced demonetisation on November 8, 2016, was widely seen as proof of its popularity among the masses. Now, even as the Centre proposes to mark DeMo’s first anniversary   as “anti-­black money day”, hundreds of farmers in Maharashtra plan to gather at Azad Maidan in Mumbai on November 8—to observe the day as a “barsi” or death anniversary. “There is a lingering effect of dem­onetisation on the rural economy,” says MP Raju Shetti, who leads the Swabhimani Paksha. “The agriculture commodities market is yet to stabilise. Farmers in Maharashtra are still not getting the right price for their produce.”

Shetti, who parted ways with the ruling NDA earlier this year, points out that INS­tead of the minimum support price (MSP), currently fixed at Rs 3,000 per quintal of soyabean, the farmers are getting only Rs 2,500. Similarly, in the case of maize, the farmers are getting only Rs 900 per quintal, though the MSP is Rs 1,400. Freshly harvested paddy is fetching Rs 1,300 per quintal (MSP: Rs 1,550), moong and urad (lentils) Rs 4,000 (MSP: Rs 5,000 and Rs 5,400, respectively).

This looks like a repeat of how it was in the weeks following the announcement of demonetisation last November, when farmers, particularly vegetable growers, were either forced to sell their harvest cheap in distress sales, or opted to dest­roy it on not being able to recover production costs. In Maharashtra alone, Shetti claims, around 400 farmers have committed suicide so far for reasons rel­ated to the impact of poor prices.

S. Mahendra Dev, director of the Mumbai-based Indira Gandhi Institute of Development Research, concurs that DeMo’s immediate impact was mostly on the rural economy, especially agriculture, and the informal sector. “GDP figures are yet to reflect the impact on the informal sector,” says Dev. “The Central Statistics Office (CSO) has taken into account only the formal and some of the relevant sectors. Once the actual numbers come, I expect the CSO will revise GDP growth for the last quarter, which will come down. Demo­netisation did have a significant impact on livelihood and employment, but as it’s already a year since, I think the one-time impact may be coming down.”

Besides data from the Centre for Monitoring Indian Economy (CMIE), which shows 1.5 million jobs were lost, there are no official numbers on jobs lost due to dem­onetisation. Experts claim that in the aftermath of job losses in urban areas, many opted to go back to rural areas to wait it out. CSO data in December or January will reflect this.

Dr V. Rukmini Rao of Secunderabad-based Gramya Resource Centre for Women points out that in the wake of money supply crunch, farm workers went without work or got lower wages as the farmers did not have enough money in hand. In the informal sector, the garment industry, for instance, was badly hit. Rao says many people from north India come to work in textile and garment factories in Coimbatore, an industrial town in Tamil Nadu. Following demonetisation, many workers were forced to go back home when the factories, faced with liquidity crunch, were closed down. That most of the workers didn’t have bank accounts did not help. Their enforced holiday added to the woes of their families in the villages.

While the casual labour economy in urban areas was hurt the most by dem­onetisation, the rural economy felt the pinch, given the to and fro between towns and villages. For instance, the persisting slowdown in the construction sector, particularly housing, meant that a large number of youth who routinely seek alt­ernative employment to supplement farm income have been left with no source of income. Remittances from urban to rural areas have come down, but the extent is still not known. Fall in rem­ittances could be one explanation of the fall in rural demand.

Abhijit Sen, an agro-economist and former member of the erstwhile planning commission, claims that none of the numbers are particularly reliable at this stage. “What we are watching, especially on the prices side, suggests that rural dem­and is extremely low at the moment. It is lower than what could be normally expected on the basis of the good agricultural output that we got last year. While several factors could be beh­ind it, demonetisation could certainly be a contributory feature,” says Sen.

Pointing to the slowing pace at which people are going from rural to urban areas in search of jobs, Sen says, “There is more waiting in rural areas for jobs rather than in urban centres. I am sure there must have been some fairly permanent damage in some quarters. If you are a cash economy and your working capital has been run down, it doesn’t recover immediately. It is not as if the cash has come back and the working capital will be back. It is just like any business that has made large losses and takes time to recover.”

What has changed considerably in the rural scenario is the practice of working on credit, which runs entirely on trust. It is still not known how much of that trust between farmers and traders has been eroded. A major factor working against farmers is the significant drop in domestic prices of many commodities, even as global food prices are on the rise, which is making some traders wary of extending credit for buying seeds and other farm inputs.

Lucknow University professor and president of Kisan Jagriti Manch, Sudhir Panwar, feels the aftershocks of demonetisation on the rural economy are being felt more acutely now. He points out that while favourable monsoon and weather conditions offset the impact on the input side, and 2016-17 witnessed record farm production, “it affected prices of all agri-produce, ranging from grains to fruits and vegetables. This could be why we witnessed more suicides in a year of record production.”

Panwar says that besides low kharif and rabi crop prices, what has affected the rural economy are the low remittances to the villages from migrant ­labour in the construction and manufacturing sectors. Moreover, the rural non-farm sector, which employs nearly 30 per cent of rural labour, mainly woman, also suffered badly. “The cascading effect of demon­etisation impacted demand and industrial production, thereby turning inf­lation into deflation. In many areas, MNREGA funds dried up because of higher dem­and,” says Panwar.

Echoing this view, Dev says, “There was deflation due to demonetisation, which led to a fall in farmers’ income. That’s why there was considerable ­unr­est among them. While nominal wages in rural areas have not increased, according to some studies, real wages, which were stagnant for three years, showed some rise for a few months, ­because there was deflation in the prices. Now, as the prices are rising, the real wages may come down.”

Pronab Sen, country director of the India-Central programme of the International Growth Centre, a multinational think-tank, also feels the rural scenario doesn’t look too good despite a good monsoon last year and this year, after two consecutive years of drought. “Usually a good monsoon after drought sees a good pick-up in agriculture growth, which we also saw,” says the former chief statistician of India. “But it was not as strong as one expected or would have liked. The prices of agriculture commodities crashed instead. It was largely due to the impact of demonetisation. The purchasing power of farmers did not grow at all despite the output going up. In effect, the farmers had three consecutive bad years, including two drought years.”

Wages in rural areas have been going up at a rate of 5-6 per cent annually over the past few years and the trend continues. But as incomes of farmers have not been going up, they are faced with the challenge of paying higher wages for farm lab­our. “Farmer incomes have certainly not improved, hence you are seeing widespread farm distress. Agriculture commodity prices have crashed, even as input costs continue to go up, so incomes are getting badly squeezed,” says Sen. Pointing out that agriculture generates most of the income in rural areas, he exp­lains how most non-agriculture activities in the rural areas are also hit if agriculture suffers. The squeeze in farm incomes has considerably impacted many small and medium enterprises. No wonder one of the fallouts of demonetisation has been the coming together of over 180 farmer groups to formulate a common charter of demands, including total farm loan waivers and price security.

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AUTHORS: Lola Nayar
TAGS: EconomyDevelopment-Growth-GDP etcDemonetisationAgriculture: Farmers'Agriculture
SECTION: Business
OUTLOOK 02 November, 2017
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