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How Demonetisation Has Affected India's Agricultural And Food Markets

Myths versus reality.

17/11/2016 2:56 PM IST | Updated 17/11/2016 4:09 PM IST
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A vegetable seller in Kolkata. (Photo by Debajyoti Chakraborty/NurPhoto via Getty Images)

India's ₹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. The situation indeed appears dire.

Business is forecast to revive only after people in 7,500-plus mandis and 600,000 villages are re-stocked with new currency. Yet, those with the courage to look beyond this doomsday scenario can spot the proverbial rainbow.

It is a myth that farmers refuse to accept cheque payment

Take farmers first. It is a myth that farmers refuse to accept cheque payment. Small dairy farmers in Andhra Pradesh accept cheques. Sugarcane farmers accept cheques from sugar factories. Moong farmers are accepting cheques from government procurement agencies. Apple farmers accept cheques from large buyers. Potato contract farmers accept cheques from food companies. Maize farmers in Nabrangpur, Odisha's poorest district, and coconut farmers in Karnataka took cheques from state agencies. The list is growing.

In Karnataka and Andhra Pradesh, which have adopted the Rashtriya eMarketServices-run Unified Markets Platform, produce worth ₹39,000 crore has been sold with cheque payment in the last four years. The 250 mandis in 10 states that have adopted the electronic National Agricultural Market (eNAM) platform for sale of primary produce are designed for cheque payment. So far, 1.60 lakh farmers, 46,000 traders and 26,000 commission agents have been registered on the e-NAM platform.

Food Corporation of India tried but failed to pay Punjab and Haryana farmers by cheque for wheat, only because the powerful commission agents want to first deduct the loan repayment amounts.

Amit Dave / Reuters
A farmer works in his sugarcane field on the outskirts of Ahmedabad, India February 28, 2015. REUTERS/Amit Dave/File photo

Direct benefit transfer for seeds has been a success even among the small and marginal farmers of Uttar Pradesh. Moreover, of the seven crore Kisan Credit Cards issued in India, more than one crore are ATM-enabled debit cards. Farmers accept insurance and disaster relief cheques. So to portray the farmer as a Luddite is both unfair and untrue.

What's more, marketing practices are changing in several crops, especially oilseeds, maize and certain spices. Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them. So even if the mandis stay shut until the cash shortage recedes, the farmer can still borrow against his commodity.

Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them

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. Most fresh produce is sold by small hawkers and vegetable mongers in the streets of India. Since they take payment in cash and buy their wares from the mandi in cash, business is down. These are symptoms of the crying need for reform.

The millers and processors who have raw material in their godown to last two-three weeks are in no panic. In any case, business in the mandis has to pick up within a month. Food is not a discretionary expenditure. The pent-up retail consumer demand will eventually pull up prices sufficiently high to lure traders and re-start the market engines.

Amit Dave / Reuters
A farmer winnows wheat in a field on the outskirts of Ahmedabad, India, March 29, 2016. REUTERS/Amit Dave

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 and used by the larger traders. They should be made cash-free.

The high incidence of indirect taxes have made it lucrative for wholesalers and distributors to stay below the radar and offer the savings as discount to consumers in a low-margin and highly competitive commodity market. Tax avoidance has become their formula for survival. A solution can be found through GST.

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

To convince agri-input and other merchants, the government should make it easier and cheaper for them to adopt card payment and mobile wallets on a trial basis. Shopkeepers should be educated about how they can expand business by moving from "cash only" to "cash and card" because it attracts more customers. Those customers also spend more because they are not hampered by lack of cash. Once village retailers accept digital payments, rural customers will follow. Exactly the way mobile wallets picked up with Ola and Uber. Economists call it the network effect.

It doesn't end there. Good customer experience is the key to adoption. The biggest argument in favour of cash is its convenience. You don't need literacy or tech savvy to use cash. Or travel miles to use an ATM. So the push for adoption of digital payments has to begin with easy documentation, quick and hassle-free KYC norms to incentivise utilisation of financial services in rural areas. Usage charges should be low and competitive so that farmers don't find them prohibitively expensive.

Amit Dave / Reuters
Farmers ride on a motorbike in front of stacked sacks filled with grains at the Agricultural Produce Market Committee (APMC) market yard on the outskirts of Ahmedabad, India, December 1, 2015. REUTERS/Amit Dave

Electronic payment points should be available at walking distance. Users should find apps easy to use and in their local language. They should quickly receive delivery, be assured of complete back-end security and have plenty of choice. The entry of payment banks will hopefully ease some of these pain points.

Once the agricultural value chain adopts electronic payments and cleans up its books to align itself with the financial supply chain, benefits will follow. The biggest will be the inflow of private and banking capital, which is waiting to power agricultural growth, and social impact capital to improve rural lives.

Cash is an inefficient medium of exchange. The World Bank estimates that the Indian government can save 1% of the GDP annually from digitising current cash-based subsidies alone. Farmers, traders, processors and retailers will never again blindly trust cash. That makes it the perfect opportunity to prise open closed minds and introduce new payment habits in this otherwise opaque part of the economy.

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