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Note ban dents farm sector, but slightly
The demonetisation move is bound to affect agriculture more in the short to medium term.
Prime Minister Narendra Modi announced a partial demonetisation drive on November 8, thereby scrapping the high denomination currency notes of Rs 500 and Rs 1,000. This is estimated to have affected currency of value ranging between 14-16 lakh crores and constituting about 86% of the currency in use.
What are its implications for one of the largest sectors in India – agriculture – which employs about 50% of the population? After two years of indifferent growth, agriculture has at last shown some positive performance, with an estimated growth of around 4% in 2016-17.
The demonetisation move has been undertaken at a crucial stage for the agriculture sector. The kharif harvest is about to reach the markets and the rabi sowing has just begun. Since most of the agricultural transactions are carried out using cash, the demonetisation is bound to affect agriculture relatively more in the short to medium term. However, the effect will vary depending upon the stage of production and types of operations involved at that stage.
Primarily, the effect will be on production, marketing and prices. Rabi sowing starts normally in the last week of October and extends until mid-December. Farmers need crucial inputs like seeds and fertilisers (at a later stage), and labour for land preparation. There is bound to be some adverse effect on input purchases due to liquidity crunch that the farmers are facing at present.
Nevertheless, the much-maligned inter-linked markets in agriculture, where the input suppliers also double up as lenders may, ironically, provide a short-term solution. However, the same may not apply to labour which is largely dependent on cash payments.
As labour constitutes about 50% of the total cost of production of most crops, this could have an adverse effect. To add to this, there is little clarity on whether the custom hiring centres for tractors and other machinery have been instructed to extend machinery on credit.
Looking at the actual status of rabi sowing in the country, as of November 18, 2016, sowing on 242 lakh hectares has been completed. This is only marginally lower than the 243 lakh hectares sown last year around the same time. More importantly, there is hardly any adverse effect visible after the demonetisation.
Between November 11 and 18, 2016, the area sown under wheat has increased from 26 lakh hectares to 79 lakh hectares – an increase of about three times. Similarly, the area under pulses has increased by 51%, coarse cereals by 29%, oilseeds by 34%, and overall there is an increase of 65% in the rabi area sown during the last one week.
These are certainly encouraging trends but considering that the target area for rabi 2016-17 is about 636 lakh hectares, sowing has been completed only on 38% of the targeted area and there is a long way to go. Only 25% of the targeted area for wheat, 67% for oilseeds and 53% for pulses have been sown so far.
Ease rabi sowing
Therefore, there is a need for measures to smoothen the rabi sowing process and allay the fears of farmers. In this context, the raising of withdrawal ceiling limit to Rs 25,000 for farmers against sanctioned loans is a welcome step. Gradually allowing cooperative banks into operations could be another step.
The kharif season is almost complete and, therefore, the impact will be mainly on the marketing of kharif produce. The first advance estimates indicate a bumper kharif production of 135 million tonnes in 2016-17. This is almost 9% higher than the production in 2015-16.
Most of the services related to marketing such as loading, unloading, storage and transportation are cash-intensive. The demonetisation may, therefore, have a negative effect on market arrivals, which is already being witnessed in many markets across the country. However, this may not be as big a problem for grains as it is for perishables like fruit and vegetables.
The absence of storage and processing technology for fruit and vegetables make these commodities highly vulnerable. There are already reports of distress sales by orange farmers in the Vidarbha region in Maharashtra. These could become more widespread if the cash crisis continues.
As for prices, it is possible that the demonetisation will have little effect on agricultural prices. This is because, there are two countervailing forces in operation. On the supply side, the liquidity crunch may unfavourably affect production and marketing, thereby reducing supplies to the market. However, the same liquidity problem might pull down the disposable income, thereby lowering the demand pressures.
The final outcome will depend upon the net effect of these two offsetting movements. But, it is reasonable to expect that the agricultural and food prices will largely remain unaffected.
(The writer is Associate Professor, Institute of Economic Growth, University of Delhi)
What are its implications for one of the largest sectors in India – agriculture – which employs about 50% of the population? After two years of indifferent growth, agriculture has at last shown some positive performance, with an estimated growth of around 4% in 2016-17.
The demonetisation move has been undertaken at a crucial stage for the agriculture sector. The kharif harvest is about to reach the markets and the rabi sowing has just begun. Since most of the agricultural transactions are carried out using cash, the demonetisation is bound to affect agriculture relatively more in the short to medium term. However, the effect will vary depending upon the stage of production and types of operations involved at that stage.
Primarily, the effect will be on production, marketing and prices. Rabi sowing starts normally in the last week of October and extends until mid-December. Farmers need crucial inputs like seeds and fertilisers (at a later stage), and labour for land preparation. There is bound to be some adverse effect on input purchases due to liquidity crunch that the farmers are facing at present.
Nevertheless, the much-maligned inter-linked markets in agriculture, where the input suppliers also double up as lenders may, ironically, provide a short-term solution. However, the same may not apply to labour which is largely dependent on cash payments.
As labour constitutes about 50% of the total cost of production of most crops, this could have an adverse effect. To add to this, there is little clarity on whether the custom hiring centres for tractors and other machinery have been instructed to extend machinery on credit.
Looking at the actual status of rabi sowing in the country, as of November 18, 2016, sowing on 242 lakh hectares has been completed. This is only marginally lower than the 243 lakh hectares sown last year around the same time. More importantly, there is hardly any adverse effect visible after the demonetisation.
Between November 11 and 18, 2016, the area sown under wheat has increased from 26 lakh hectares to 79 lakh hectares – an increase of about three times. Similarly, the area under pulses has increased by 51%, coarse cereals by 29%, oilseeds by 34%, and overall there is an increase of 65% in the rabi area sown during the last one week.
These are certainly encouraging trends but considering that the target area for rabi 2016-17 is about 636 lakh hectares, sowing has been completed only on 38% of the targeted area and there is a long way to go. Only 25% of the targeted area for wheat, 67% for oilseeds and 53% for pulses have been sown so far.
Ease rabi sowing
Therefore, there is a need for measures to smoothen the rabi sowing process and allay the fears of farmers. In this context, the raising of withdrawal ceiling limit to Rs 25,000 for farmers against sanctioned loans is a welcome step. Gradually allowing cooperative banks into operations could be another step.
The kharif season is almost complete and, therefore, the impact will be mainly on the marketing of kharif produce. The first advance estimates indicate a bumper kharif production of 135 million tonnes in 2016-17. This is almost 9% higher than the production in 2015-16.
Most of the services related to marketing such as loading, unloading, storage and transportation are cash-intensive. The demonetisation may, therefore, have a negative effect on market arrivals, which is already being witnessed in many markets across the country. However, this may not be as big a problem for grains as it is for perishables like fruit and vegetables.
The absence of storage and processing technology for fruit and vegetables make these commodities highly vulnerable. There are already reports of distress sales by orange farmers in the Vidarbha region in Maharashtra. These could become more widespread if the cash crisis continues.
As for prices, it is possible that the demonetisation will have little effect on agricultural prices. This is because, there are two countervailing forces in operation. On the supply side, the liquidity crunch may unfavourably affect production and marketing, thereby reducing supplies to the market. However, the same liquidity problem might pull down the disposable income, thereby lowering the demand pressures.
The final outcome will depend upon the net effect of these two offsetting movements. But, it is reasonable to expect that the agricultural and food prices will largely remain unaffected.
(The writer is Associate Professor, Institute of Economic Growth, University of Delhi)
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(Published 22 November 2016, 17:30 IST)
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