Effect of Demonetization on Agriculture Arun Balamatti

Presentation outline What is demonetization? Why has the government done this? Demonetization: Some ‘Nate’able Criticisms Pro-Demonetization Arguments Effect of Demonetization: On Agriculture – Economy Conclusions

Demonetization It is essentially a financial tool But, has triggered more political debates than economical Depending on which side of the fence you are on, You call it ‘surgical strike’ OR A ‘monumental blunder’ Still too early to judge its real impact on the economy.

What is demonetization? Demonetization is defined as the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes, the two biggest denominations in its currency system These notes accounted for 86% of the country’s circulating cash

Why has the government done this? Combat inflation Corruption Discourage a cash-dependent economy

Why has the government done this? Suddenness ? “Shock & Awe” are the necessary elements of the DeMo process Despotic act ? Action taken by duly elected people within the framework of a democracy.

Demonetization Some ‘Nate’able Criticisms

Only an authoritarian government can calmly cause such misery to the people Amartya Sen

Organized loot, legalized plunder Dr. Manmohan Singh

A ‘Modi-made disaster’, “launched to ‘repay’ 50 super rich families which helped Modi become the PM of India.” Rahul Gandhi

Assault on the “lakshmir jhapi”—the vegetable vendor or tea garden worker Mamata Banarjee

Tughlaki farman Aravind Kejrival

Hazards of demonetization: Counter argument Opposition needs to have a logical reasoning behind it. Fundamental argument against demonetization: The labourer & the farmer—people reliant on cash— have been severely affected by the scheme An avg. farmer earns Rs. 6,426/m From farming & other activities Not many farmers have more than half an acre of land in India The actual farmer subsists on less than Rs. 100 a day Do they use 500 rupee notes on daily basis?

The purpose is not to “replace” the cash within the economy, rather, to have less cash to flow within the economy Manu Sharma, editor at CVoter

Demonetization Pro-Demonetization Arguments

The goal of this is to clean transactions, [to] clean money Arun Jaitley

A courageous and substantive economic reform that, despite the significant transition costs, has the potential to generate large future benefits Jagdish Bhagwati, Professor, Columbia University

This announcement appears to be the most significant change made by the Modi government to date Girish Vanvari, Partner & head (tax), KPMG in India

Its impact could be even bigger than GST Crisil, a global S & P company

Effect of Demonetization: On Agriculture – Economy A month after DeMo the unorganized sector is believed to have been the worst-hit, especially those workers who received their income in cash.

Effect of Demonetization: On Agriculture – Economy Timing: End of Kharif season (harvesting) and the beginning of Rabi season (sowing) India's Rs. 17 lakh-crore agricultural and food markets, from the mandi to the neighbourhood grocer, are at a standstill. Demonetisation has vacuumed liquidity from this virtually cash-only economy that provides livelihood to half the population. Prices have crashed and fresh produce lies rotting.

Effect of Demonetization: On Agriculture – Economy Anxiety, caution, frustration and optimism have had one common ‘caveat’; demonetization would cause short term discomfort but bring benefits in the long term. Because of demonetization, while lending rates have come down, bank deposits have increased; if those lower lending rates can be translated into higher investment, then there's certainly going to be less risk from demonetization.

Effect of Demonetization: On Agriculture – Economy Modi’s demonetization initiative caused a sudden breakdown in India’s commercial ecosystem. Trade across all facets of the economy was disrupted, and cash-centric sectors like agriculture, fishing, and the voluminous informal market were virtually shutdown. Many businesses and livelihoods went down completely —  not to mention the economic impact of millions of people standing in line for hours to exchange or deposit cancelled banknotes rather than working or doing business.

Effect of Demonetization: On Agriculture – Economy Agricultural growth in India contracted 0.2% in 2014-15 and grew no more than 1.2% in 2015-16, largely because of back- to-back droughts. Expected to grow at 4% in this year, but looks unlikely because farmers are running out of cash to buy seeds, fertilizer, equipment, and pay wages to workers and commission to agents etc. Because of cash shortage the daily supply from transport system has also suffered which has resulted in 25 to 50% reduction in sales (Bansal 2017).

Effect of Demonetization: On Agriculture – Economy Effect on Sown Area: During the week ending 30th December, 2016, net sown area under rabi crops exceeded the normal area by 2.77% and area sown last year by 6.86%. Crop-wise effect: By the end of December, compared to the corresponding period last year, wheat is sown on 7.7% higher area, Area under pulses and oilseeds is higher than normal for the corresponding period by 11.2 and 1.7%, respectively,

Effect of Demonetization: On Agriculture – Economy The shortfall in area is reported for rabi rice and course cereals, Among major rabi crops growing states, overall shortfall in sown area is about 20% in Tamil Nadu and Karnataka and 8% in Gujarat and Andhra Pradesh. J&K and Himachal Pradesh also show major deficit in rabi sowing. Largest shortfall is seen in Kerala.

Effect of Demonetization: On Agriculture – Economy All other major states indicate small to large increase in crop sown area this year over normal area. Even Uttar Pradesh, which was persistently showing shortfall in area, has reached higher than normal figure. Effect on Productivity: The major impact is going to happen due to change in use of fertilizer. According to MoA source, fertilizer off take during the current rabi season (till 21 Dec. 2016) was lower than the fertilizer off take in the corresponding period during 2014-15 and 2015-16 by 7.47% and 7.0%.

Effect of Demonetization: On Agriculture – Economy Effect on Prices: Prices of maize and soybean fell in the month of December but paddy prices ruled higher than previous two months and also as compared to last year. The perishables, vegetables and fruits, in most markets and states showed a drop in market arrival as well as prices post demonetization. Wholesale prices of banana, apple, tomato and cabbage in the month of November in APMC mandis of the country, taken together, were 3.80, 3.86, 8.47 and 5.6% lower compared to the month of October, respectively

Effect of Demonetization: On Agriculture – Economy Effect on Output Growth: Rabi output in 2016-17 could be 4.96% higher than 2015-16 due to higher rabi area and despite lower use of fertilizers. Growth story of agriculture is intact as demonetization is found to cause small and insignificant effect on growth of output as well as farmers’ income. Agriculture, the largest informal sector of Indian economy, has shown strong resilience to effect of demonetization (Chand and Singh 2016).

Effect of Demonetization: On Agriculture – Economy Production in 2016-17 could drop if sowed acreage (Rabi) reduces for want of enough seeds, Yields could fall from late sowing and subsequent exposure to rough spring weather, the lack of sufficient or timely application of fertilizers, pesticides, Labour shortages and wage-spikes may follow with a lag, Plantation crops such as rubber, tea, jute, cardamom are seeing no wages paid to workers,

Effect of Demonetization: On Agriculture – Economy Small-medium tea growers have few buyers now, Raw jute trade is halted as paucity of funds affects procurement-delivery by traders, Cotton is witnessing havoc: daily arrivals have plunged to 30,000-40,000 bales against the usual 1.5-2 lakh bales at this time, Vegetables and fruits along with crops (added 61% of agriculture’s gross value in 2015-16), depend critically upon a cash-strapped transport sector for daily supply network.

Effect of Demonetization: On Agriculture – Economy

Effect of Demonetization: On Agriculture – Economy

Demonetisation will have little impact on agricultural growth, but will hit farmers hard. CSC Shekhar Professor, Institute of Economic Growth, Delhi University

Effect of Demonetization: On Agriculture – Economy According to MOSPI data for Q3 of FY 2016-17 GDP expanded a healthy 7.0% annually in the October to December period, below the 7.4% expansion in the previous quarter, but nearly a full percentage point above market expectations, Bouzanis (2017). Agriculture GDP grew 6% during October-December as compared with a 2.2% fall in the same quarter of last year and 3.8% in July-September (Ray 2017) Government services and agriculture saw "extremely robust" growth at 12% and 6% YoY, respectively.

Effect of Demonetization: On Agriculture – Economy Much to the anguish of many Harvard and Oxford Graduates, the government of a tea seller has succeeded in maintaining the economy’s growth at 7% and the numbers seem to completely negate the kind of negative projections and speculations which were being made about the impact of demonetization (Mishra 2017).

Strong Indian economy, strong rupee The rupee hit a 16-month high against the US dollar on Wednesday, 15.03.2017

Conclusions The political triumph of the ruling government, more so in UP, has reinforced the positive economic indicators of Q3 of FY 2016-17 and has seemingly silenced the critics. It is true that the small and marginal farmers who sell off their produce in the village itself are hurt by the demonetisation. Similarly, value chains with minimal processing and direct consumer sales such as fruits and vegetables are hit.

Conclusions Visible difference will come if the government uses demonetisation to persuade two intermediaries in the value chain — the trader and the village shopkeeper — to adopt electronic payments. All the APMC markets are regulated by state governments & used by the larger traders. They should be made cash-free. Cash is an inefficient medium of exchange. The World Bank estimates that the Indian govt., can save 1% of the GDP annually from digitising current cash-based subsidies alone.

Conclusions In the long run, this is nothing short of a revolutionary measure in moving a traditional cash centric economy to a fourth industrial revolution era. It's audacious, brash, and a future-cantered decision, which has changed India, its people, politics, and money game forever, India will be 'before demonetization' and 'after demonetization,' BD and AD.” (Shepard 2017, quoting Monishankar Prasad, author)

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