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Study of Impact of Demonitisation On Agriculture Sector in India
Study of Impact of Demonitisation On Agriculture Sector in India
Study of Impact of Demonitisation On Agriculture Sector in India
Demonitisation on
Agriculture Sector in India
With support of
Submitted By
GAJJARAPU SRI HARSHA
(Reg.No:116200238013)
Under the guidance of
Prof. P VENI
M.Com PhD
1
Certificate
This is to certify that the dissertation entitled “STUDY OF IMPACT OF DEMONITISATION
ON AGRICULTURE SECTOR IN INDIA” with support of FOUNDATION FOR DEMOCRATIC
REFORMS; HYDERABAD has been prepared by GAJJARAPU SRI HARSHA, a student of Master of
Business Administration (Banking and Financial services) in Department of Commerce and
Management Studies, Andhra University, Visakhapatnam under my guidance.
GAJJARAPU SRI HARSHA has completed the project work as prescribed under M.B.A rules
and the dissertation submitted by him is genuine and bonafide work done under my supervision.
2
Declaration
3
ACKNOWLEDGEMENT
At the outset, I express my profound respect and deep sense of gratitude to my
Project Guide Prof. P Veni Professor of commerce, Andhra University, Visakhapatnam for
her valuable guidance and for sparing her valuable time day in a day out during the course
of my work.
I am thankful to Prof. G.SATYANARAYANA, Head of the Department of Commerce
and Management Studies, Andhra University for his help and support.
I am thankful to Prof. K. RAMAMOHAN RAO, Principal of College of Arts and
Commerce, Andhra University for his help and support.
I am extremely thankful to Dr. N. JAYAPRAKASH NARAYAN, General Secretary of
Foundation for Democratic Reforms for his support and encouragement during the period
of my work.
I am also thankful to Nishar Fatima, Mugalayya, Rani Satya, Aditya, Aman Jain,
Karthik, Srikath Reddy, Sethu Upadhyay at Foundation for Democratic Reforms for their
valuable assistance and support.
I would like to place my acknowledge to scores of people who helped me in this
study in one way or other but wish to remain in oblivion.
4
INDEX
CONTENTS PAGE NO
CHAPTER – 1 6-8
5
Chapter-1 Brief History of Demonetisation
1. Definition of Demonetization
Demonetization is the withdrawal of a particular form of currency from circulation. Through
demonetization the old currency is replaced by the new currency or a currency circulation is
blocked. There are multiple reasons why a country demonetizes its currency; some reasons
include checking the inflation, to curb the corruption and to promote the cashless transactions,
thus bringing transparency within all the existing legal transaction modes in the country, giving
1
boost the country’s economic development.
2. The History of Demonetization around the world
In the world history, one can see several instances of the demonetization which were
implemented in various countries of the world. Many of these countries accepted the policy of
demonetization which was targeted to make the country’s failing economy strong. The following
2
segment briefly discusses some of the countries which underwent the purge of demonetization.
2.1 Britain
Before 1971, pound and penny currencies were used to be circulated in Britain but to bring
uniformity in currency; the government stopped circulation of old currency in 1971, and
introduced coins of 5 and 10 pounds. Though, government was continuously working towards
this big change from last 2 years in the meantime they also prepared the citizens in advance of
this impending change. Though Britain underwent demonetization but it had little impact upon
the people and economy as of such, as the government gave sufficient time to people to have their
money exchanged and also money was made available in all banks to ensure a smooth
3
functioning of the country’s economy.
2.2 Congo
Dictator Mobutu Sese made some changes with currency of Congo for the smooth running of
economy during 1990s. However, these changes didn’t give any better result of it in economy, as
Congo was strife with corruption and ethnic war which resulted in prices of necessity goods rise
exorbitantly and share market saw a heavy downfall. This sudden call of demonetization also led
4
to the downfall of the dictator and with it came an end to the demonetization.
2.3 Ghana
In 1982, Ghana demonetized their 50 cedis note to tackle tax evasion and empty excess liquidity.
This made the people of the country support the black market and they started investing in
physical assets which obviously made the economy weak.
2.4 Myanmar
In 1987, Myanmar’s military invalidated around 80% value of money to curb black market. The
decision led to economic disruption which paralyzed daily activities and inflation rose up with it
commodities began to disappearing sooner from markets which in turn led to mass protests and
clashes with the military government that killed thousands of people.
1
http://www.iasparliament.com/demonetisation/. Accessed on 26/12/2016.
2
http://www.valuewalk.com/2016/11/demonetization-india/. Accessed on 26/12/2016.
3
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-2\. . Accessed on 26/12/2016.
4
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-2\. . Accessed on 26/12/2016.
6
This call of demonetization by the Burmese government proved very costly for the country and
many economist calls it a poor decision as small traders and common public were the worst
5
affected during this demonetization implementation.
2.5 Nigeria
The process of demonetizing the currency in Nigeria was done during the government of
Muhammadu Buhari in 1984; Nigeria introduced new currency and banned the old notes.
However, the debt-ridden and inflation hit country did not take the change well and the economy
6
collapsed.
2.6 North Korea
The demonetization that happened in North Korea in 2010 left people with no food and shelter.
Kim Jong ll introduced a reform that knocked the face value of the old currency in order to banish
black market. This however, was poorly planned and created an acute shortage of cash and
supplies and North Korea was also criticized for testing nuclear missiles as a show of strength
when the country was grappling and struggling with the new reform which crippled its affairs
7
completely and many people starved to death.
2.7 Russia (formerly U.S.S.R)
Mikhail Gorbachev ordered to withdraw large ruble bills from circulation to take over the black
market. However this attempt to recall the notes didn’t go well with the citizens resulted into a
8
coup attempt which brought down his authority and further the leading to Soviet Union breakup.
4. Demonetization in India
India is considered to be a developing nation and consider herself as economically growing
towards progress. India is seen to in par with most of the world global powerful nations who
9
assert themselves in the NSG (Nuclear Suppliers Group), seeking favor and support from two
world superpowers USA and Russia, and continues to make allies with neighboring nations who
are considered as third world countries.
However despite of such progress, India too wasn’t spared from the scourge of demonetization.
India went through the scourge of demonetization not once but thrice. Narendra Modi commented
on the demonetization “The time for India and its citizens to go through a ritual cleansing has
10
come and we all need to be purified, in hopes of a better nation”.
4.1 History of demonetization in India
th
The first wave of demonetization occurred in the year 1946, on 12 January Rs.1000 and Rs.
10,000 which were in circulation were demonetized primarily to stop unaccounted money. The
government through this drive collected Rs.134 crore of the total Rs.143 crore available in the
market (according to RBI estimates), only Rs.9 crore was not exchanged therefore demonetized.
It turned out to become more like a currency conversion drive as the government couldn’t achieve
much of profit in the cash-strapped economy at that time.
5
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-2\. . Accessed on 26/12/2016.
6
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-2\. . Accessed on 26/12/2016.
7
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-1\. Accessed on 26/12/2016.
8
https://www.quora.com/Has-any-country-other-than-India-ever-had-Demonetization-of-their-currency-
notes-2\. . Accessed on 26/12/2016.
9
Nuclear Suppliers Group (NSG) is a group of nuclear supplier countries that seek to prevent nuclear
proliferation by controlling the export of materials, equipment and technology that can be used to manufacture
nuclear weapons. https://en.wikipedia.org/wiki/Nuclear_Suppliers_Group. Accessed on 26/12/2016.
10
http://www.daga.org.hk/press/urm/urm4/chap01.htm. Accessed on 26/12/2016.
7
The second wave of demonetization happened in the year 1978, during the reign of Morarji Desai,
when the Wanchoo Committee appointed by the government decided to recall the re-introduced
Rs.1,000, Rs.5,000 and Rs.10,000 entirely from the cash system as the country was going through
a difficult time. In 1965, despite India winning the Indo-Pak war, the military expenditure pushed
11
inflation close to 7%.
The third wave of Demonetization occurred in the year 2016 on November 8th, the Modi-led
government had controlled the inflation, made India more investment friendly, and getting strong
leaders on board, we didn’t have much of a problem like in 1946 and 1978. It was a kind of
12
Swacch Bharat Abhiyan drive by the government to get more perspective points and reduce
black money effect on the economy controlled by some powerful politician and businessmen. The
master stroke of this demonetization was the announcement was done by Mr.PM at 8 pm IST
rather by the RBI in the morning. Most of the businesses were shut for the day and people were
wrapping up from their day’s work. Banks remained closed for the next day paralyzing the
country. Black money hoarders couldn’t find a way out to funnel the black money, making it a
13
fool proof plan to nab all the hoarders under the tax radar.
Need for the Study: Agriculture sector is the backbone of Indian society. Still majority of
population are dependent on the Agriculture Sector and after the introduction of the
Demonitisation by the government the agriculture has faced several difficulties. This study is
primarily carried out in order to understand the difficulties and the challenges faced by the
farming community of selected samples from the Vadlamuru village, Atchutapuram village of
Kapileswarapuram Mandal, East Godavari District and from the Ulichi village, Prakasam District
of the state of Andhra Pradesh. .
Objectives of the Study: The main objective of this study is to understand the difficulties and the
challenges faced by the various sections of the farming community
Research Methodology: This study is based on both the primary data as well as the secondary
data. The primary data includes the views expressed by the 28 farmers from the Vadlamuru
village, Atchutapuram village of Kapileswarapuram Mandal, East Godavari District and 12
farmers from the Ulichi village, Prakasam District of the state of Andhra Pradesh. The secondary
data includes various reports collected on the Internet. Graph and percentile method has been
used to analyse the data.
Limitations of the study: Though the present study highlights some of the important issues
regarding agriculture during the demonetization, it is not free from some of its inherent limitations
which are a) Limited sample size, b) Data from processors is excluded, c) Other sectors of economy
like industries and service sectors were not included despite the fact that they have greater share in
GDP than agriculture, d) Valuation of cost and benefits of demonetization is missing, e) The present
study is only of preliminary in nature and can’t be generalized for the overall agricultural sector
11
https://www.academia.edu/30269141/Demonetization_of_Indian_Currency_and_Its_Impact_on_Banglade
sh_Economy. Accessed on 26/12/2016.
12
Swachh Bharath Abhiyan or Clean India Mission is a national level campaign by the Government of India
covering 4041 statutory towns to clean the streets, roads, and infrastructure of the country. This campaign was officially
launched on 2 October 2014 at Rajghat, New Delhi, where Prime Minister Narendra Modi himself wielded broom and
cleaned a road. The campaign is India’s biggest ever cleanliness drive and 3 million government employees and schools
12
and colleges students of India participated in this event. https://www.quora.com/What-is-swaach-bharat-abhiyan...
Accessed on 27/12/2016.
13
https://www.academia.edu/30641117/Demonetisation_Maturing_Capitalism. Accessed on 27/12/2016.
8
Chapter-2 Agriculture in India
Agricultural productivity depends on several factors. These include the availability and
quality of agricultural inputs such as land, water, seeds and fertilizers, access to agricultural
credit and crop insurance, assurance of remunerative prices for agricultural produce, and
storage and marketing infrastructure, among others. This report provides an overview of the
state of agriculture in India. It discusses factors related to the production and post-harvest
activities in agriculture.
As of 2009-10, more than half of the total workforce (53%) of the country, i.e. 243 million
1
persons were employed in agriculture. The share of population depending on agriculture
for its livelihood consists of landowners, tenant farmers who cultivate a piece of land, and
agricultural labourers who are employed on these farms. Agricultural output has been
volatile over the past 10 years, with annual growth ranging from 8.6% in 2010-11, to -0.2%
2
in 2014-15 and 0.8% in 2015-16. Figure 1 shows the trend in the growth of agricultural
sector over the past 10 years.
Figure 1: Growth in agriculture sector (%) Figure 2: Contribution to GDP of sectors (%)
8% 70%
7% 60%
6% 50%
5% 40%
4% 30%
3% 20%
2% 10%
1%
0%
0%
1990-912000-012010-112015-16
1960-611970-
1950-51
1980-81
2007 -08
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2006-07
2005-06
2004-05
71
As seen in Figure 2, the agriculture sector’s contribution to the Gross Domestic Product
(GDP) decreased from 54% in 1950-51 to 15.4% in 2015-16, while that of the services
3,2
sector increased from 30% to 53%. While the agriculture sector’s contribution to GDP has
decreased over the past few decades, the contribution of sectors such as manufacturing
(employing 10.5% of the population) and services (employing 24.4% of the population) has
1
increased.
9
Agricultural production and yield
Figure 5 shows the production of crops over the past few decades. The production of
major crops over the past few decades is shown in Table 7 in the Annexure.
0
1
2
0
1
0
1
1
-
20
The production of wheat and rice took
0
off after the green revolution in the
1970-711980-811990-
1950-511960-61
152015-16
Agricultural trade
Major commodities imported to India are pulses, edible oils, fresh fruits and cashew nuts. Major
commodities exported by India are rice, spices, cotton, meat and its preparations, sugar, etc. Over the
past few decades, the share of agricultural imports in total imports has increased from 2.8% in 1990-
91 to 4.2% in 2014-15, whereas the share of agricultural exports has reduced from 18.5% to
17
12.7%. Tables 1 and 2 show the major agricultural exports and imports over the past three years.
Table 1: Agricultural exports (in $ billion) Table 2: Agricultural imports (in $ billion)
Commodity 2013-14 2014-15 2015-16 Commodity 2013-14 2014- 15 2015-16
Rice 6.2 7.8 7.9 Pulses 2.4 1.8 2.8
Meat and meat Cashew 1.0 0.8 1.1
3.3 4.5 4.9
preparations
Vegetable oils 9.9 7.2 10.6
Processed foods 2.8 2.7 2.7
Fresh fruits 1.1 1.3 1.6
Spices 2.8 2.5 2.4
Oil meals 3.0 2.8 1.3 Spices 0.5 0.6 0.7
10
India’s trade policy is affected by factors such as domestic availability of commodities, cost
18
of production as well as global price levels. However, frequent changes in trade policy,
such as reducing the import duty on a commodity in response to a shortage in supply, or
decreasing minimum export price of a commodity to facilitate its exports, may have an
18
adverse effect on the development of the agro-processing sector.
Of the total agricultural area under operation, 10% of land has been given out on agricultural
21
leases, with the percentage of leased out land varying across states. 34% of the land in
Andhra Pradesh, 25% in Punjab, 21% in Bihar and 18% in Sikkim has been leased out. In the
past, states such as Karnataka and West Bengal have attempted to provide legal rights to tenant
farmers by forming electronic records of land holdings and giving tenant farmers the right to
22,23
their produce.
11
21
Currently, laws of tenancy of agricultural land vary across different states. States such as
Kerala, Jammu and Kashmir and Manipur completely prohibit the leasing of agricultural land.
Others such as Bihar, Karnataka, Uttar Pradesh, Telangana and Odisha allow land leasing only
by certain categories of land owners. On the other hand, states such as Gujarat, Maharashtra, and
Assam do not explicitly prohibit leasing, and allow the tenant to purchase the land from the
owner after a specified period of tenancy. In Andhra Pradesh, Tamil Nadu and West Bengal,
there is no legal ban on leasing land. Different states also have different ceilings on the area of
21
land which may be leased.
The NITI Aayog has proposed a Model Land Leasing Law to provide for the legalisation of land
21
leasing. This would ensure that land owners have the security of ownership rights, and land
tenants are secure in their tenancy. Legalisation of land tenancy would also ensure that farmers
get access to formal credit, insurance, and inputs such as fertilizers. Table 16 in the Annexure
provides details regarding land leasing restriction and the extent to which the Model land leasing
24
law has been adopted in states. Only Madhya Pradesh has adopted the Model land leasing law
so far.
Access to agricultural credit is linked to the holding of land titles. As a result, small and
marginal farmers, who account for more than half of the total land holdings, and may not hold
25
formal land titles, are unable to access institutionalized credit. Farmers may require credit
for short term uses such as purchasing inputs, weeding, harvesting, sorting and transporting, or
long term uses such as investing in agricultural machinery and equipment, or irrigation. Table
4 shows the distribution of agricultural loans according to sources, as of 2013.
12
Farmers with land holdings of less than a hectare primarily borrow from informal sources of
credit such as moneylenders (41%), whereas those with land holdings of two or more hectares
primarily borrow from banks (50% or more). Other major sources of agricultural credit include
shopkeepers, relatives or friends, and co-operative societies. Key issues relating to agricultural
credit are lack of access to formal credit owing to unclear land records, skewed ratio between
short term and long term agricultural credit, and inadequate access to crop insurance. These are
25
summarized below.
Short term credit is generally taken for pre-harvest and post-harvest activities such as weeding,
harvesting, sorting and transporting. Long term credit is generally taken in order to invest in
agricultural machinery and equipment, irrigation and other developmental activities, etc. Over
the past few decades, the trend of short term and long term agricultural credit in the country has
reversed. In 1990-91, a majority of crop loans taken was long term credit, whereas short term
26
credit accounted for only about a quarter of all agricultural loans. As of 2011-12, 61% of crop
27
credit was short term, whereas long term credit had a share of 39%.
In addition, small and marginal farmers, who account for about 86% of total land holdings, take
more short term loans than farmers with medium or large land holdings. This group of farmers
also has the highest share of borrowings from informal sources of credit such as moneylenders,
family and friends.
The Standing Committee on Finance has recommended that assessment of crop damage should be
completed and compensation should be deposited directly into farmers’ accounts in a timely
29
manner. In addition, to reduce the seeking of unproductive credit, the government should create
awareness about what crops should be grown based on the quality of soil and incidence of
29
rainfall, etc. in different regions.
A Committee on Financial Inclusion under the Reserve Bank of India had recommended that
credit eligibility certificates, which would act as tenancy/lease certificates should be issued to
25
tenant farmers. These certificates would enable also landless cultivators to obtain
agricultural credit. It recommended that the Reserve Bank of India should issue guidelines to
banks, to give loans to farmers against these certificates
13
Pradhan Mantri Fasal Bima Yojana
30
The Pradhan Mantri Fasal Bima Yojana was launched by the central government in January 2016.
The scheme aims to provide insurance coverage to farmers for crop failure, stabilise farmers’ income,
and encourage farmers to adopt modern agricultural practices, among others. The scheme has been
allocated Rs 9,000 crore in the Union Budget 2017-18, compared to Rs 5,501 crore in
31,32
2016-17. The scheme covers all farmers, including tenant farmers and sharecroppers, who
are growing notified crops in notified areas. It covers crops such as cereals, pulses, oilseeds,
vegetables, and spices. As of December 2016, the scheme has covered 367 lakh farmers for a sum
of Rs 1,41,625 crore in the Kharif season of 2016, as compared to 309 lakh farmers and a sum of
33,34,35
Rs 69,307 crore in the Kharif season of 2015.
Availability of water
Currently, about 51% of the agricultural area cultivating food grains is covered by
36
irrigation. The rest of the area is dependent on rainfall (rain-fed agriculture). Sources of
irrigation include ground water (wells, tube-wells) and surface water (canals, tanks). Table
5 shows the various sources of irrigation used in agriculture.
Table 5: Sources of irrigation (as of 2010-11) There is a need to improve the efficiency
Source of % share of Number of of water use, especially in agriculture.
Irrigation holdings holdings Irrigation currently consumes about 84%
Tube wells 44.2% 31,722 of the total available water in the
Canals 25.7% 18,414 37
country.
Wells 19.7% 14,101
The past few decades has led to an overuse of ground water sources in states, especially
those growing water intensive crops such as rice. For instance, in Haryana and Rajasthan,
40%-75% of the ground water units are over-exploited, and the situation is worse in Punjab,
38
where 75%-90% of ground water units have been over-exploited. Details of ground water
development across states may be found in Table 15 in the Annexure.
The Commission for Agricultural Costs and Prices has recommended that quantitative
39
ceilings should be fixed on the per hectare use of water. In addition, farmers using lesser
water than the ceiling fixed should receive money equivalent to remaining units of water at
the current domestic costs. This would incentivize them to ration their use of water.
14
In 2011 and 2013, the government released Model Bills for Ground Water Management,
40
based on which states could formulate their own laws. It also launched a Policy in 2012
41
relating to water demand management, efficiency of water usage, and pricing. The Model
Bills were based on the doctrine of public trust, under which resources meant for public use
cannot be converted into private ownership. More recently, the Ministry of Water Resources
42
circulated a Model Bill for Groundwater, 2016, which may be adopted by states. The Bill
provides an institutional framework for the protection and management of groundwater. It
states that groundwater is a common resource of all persons, and ownership of the land over
a groundwater resource should not deprive others from accessing it. It also states that
industrial or bulk usage of groundwater will be priced.
Micro-irrigation techniques
The Economic Survey 2015-16 observed that India largely uses the technique of flood
43
irrigation, where water is allowed flow in the field and seep into the soil. This results in the
wastage of water since excess water seeps into the soil or flows off the surface without being
utilised. It has been recommended that farmers should move from flood irrigation to the drip
44
or sprinkler irrigation systems (micro irrigation). This would help in conserving water as
well as save on the cost of irrigation. Using micro-irrigation systems (such as drip or
sprinkler irrigation) has also been linked to an increase in the yield of crops.
Note that India uses 2-3 times as much water to produce one tonne of grain as countries such
43
as China, Brazil and the United States. If India also increases its efficiency of water use, it
will be able to cover a wider area for irrigation. Table 14 in the Annexure provides a state-
wise coverage of micro-irrigation in the country.
Quality of soil
Soil is one of the most important factors in the productivity of agriculture. Indian soil
consists of primary nutrients such as nitrogen, phosphorous and potassium, secondary
nutrients such as sulphur,
45
calcium and magnesium, and micro-nutrients such as zinc, iron, and manganese. While the
levels of food production have increased over the past few decades, it has also led to issues
such as an imbalance of nutrients in the soil, decline in the water table as well as the quality
of water, and overall depletion of soil health. The Ministry of Agriculture has noted that the
46
quality of Indian soil is deteriorating. About 5.3 billion tonnes of soil gets eroded annually,
at a rate of about 16.4 tonne/hectare.
15
Imbalance in the use of fertilizers in soil may also result in a loss of fertility. If farmers are
unaware about the kind of fertilizer which is required for the soil in which they sow their
crops, the productivity of the soil will be subsequently affected. The Soil Health Card
scheme was launched by the central government in 2015. Under the scheme, all farmers are
issued soil health cards, once every three years. The soil health cards contain information
such as the nutrient status of the soil, and the recommended dose of nutrients to be provided
to the soil to improve its fertility. As of February 2017, 2.9 crore farmers have been covered
47
under this scheme. 2.5 crore soil samples have been collected, and 1.8 crore samples have
48
been tested. The Ministry had set a target of 2.53 crore samples to be collected by March
2017
Imbalance in use of fertilizers
An imbalanced use of urea may lead to
a loss of fertility in the soil over a
period of time, affecting productivity.
Figure 7: Consumption of fertilizers (lakh tonnes) Urea (N) is the most produced (86%),
300 consumed (74%) and imported (52%)
49
250 fertilizer in the country. The
200 government determines the quantity of
150 fertilizers to be imported based on their
domestic availability.
100
50 However, the process of fixing the
0 quantity to be imported and actually
2008-092009-102010-11
2004-052005-06
2006-072007-08
2013-142014-15
crops on time, it leads to the growth of black markets selling urea, often at prices above the
49
maximum retail prices.
The level of fertilizer required for a crop depends upon the soil type, level of yield, and water
6
availability, in addition to the type of crop. Certain crops such as rice, wheat, maize, cotton
and sugarcane require larger quantities of nitrogen as compared to pulses, fruits and
vegetables. Although the ratio of N, P, and K fertilizer usage across crops has increased, the
quantity of fertilizers used by India is still lower as compared to other countries. The average
consumption of fertilizers increased from 106 kg per ha in 2005-06 to 128 kg per ha in 2012-
13. In comparison, Pakistan consumes 205 kg per ha and China consumes 396 kg per ha.
16
Fertilizer Subsidy
To promote the use of fertilizers by
Figure 8: Fertilizer subsidy (in Rs crore) farmers, the central government
80,000 provides a fertilizer subsidy to the
producers of fertilizers. In 2017-18, Rs
60,000 70,000 crore has been allocated for
40,000 fertilizer subsidy, which is the second
biggest expenditure on subsidy after
20,000 32
food subsidy.
0
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Allocations for fertilizer subsidy have
been increasing at an annual rate of
Note: Subsidy figure for 2016-17 is a revised 11.4% between 2000 and 2016. Of the
estimate, and for 2017-18 is a budgeted
subsidy allocated for 2017-18, Rs 49,768
estimate.
crore has been allocated for subsidy on
Sources: Expenditure Budget, Union Budgets
2000-01 to 2017-18; PRS. urea. Figure 8 shows the trend in the
fertilizer subsidy 2000-01 onwards.
Currently the amount of subsidy to be given is determined based on the cost of production of
49
the fertilizer company. Companies with a higher cost of production receive greater
subsidies. This reduces the companies’ incentive to reduce their cost of production. Although
the consumption of urea has been increasing over the past decade, no new domestic
49
production capacity has been added in the past 15 years.
A Committee that examined the role of Food Corporation of India recommended that cash
51
transfers should be made to farmers to replace the current fertilizer subsidy regime. This
would allow farmers to choose fertilizers in the combination best suited to their needs, and
help them to fix the fertilizer imbalance in soil. In the Union Budget 2016-17, it was
announced that a direct benefit transfer program for fertilizers would be launched on a pilot
52
basis in a few districts across the country. In July 2016, the government announced that it
53
would be conducting pilot studies of direct benefit transfers in 16 districts in 2016-17.
Use of pesticides
The consumption of chemical pesticides in the country has increased over the past few
54
years, from 55,540 tonne in 2010-11 to 57,353 tonne in 2014-15. Over this time period,
the imports of pesticides also increased from 53,996 tonne to 77,376 tonne. Issues with
regard to the use of pesticides include use of low-quality pesticides, and a lack of
awareness about pesticide use. The Economic Survey 2015-16 noted that the use of
pesticides without proper guidelines has led to an increase in pesticide residue being
18
found in food products in India.
17
While the production of pesticides is monitored by the Ministry of Chemicals and Fertilizers,
their usage is administered by the Ministry of Agriculture. There is a need to review the
6
Insecticide Act, 1968, to provide for a regulatory framework for the pesticides sector. The
Standing Committee on Agriculture has also recommended that a Pesticides Development
and Regulation Authority be created to regulate the manufacturing, import and sale of
6
pesticides in the country. Other recommendations include developing an integrated pest-
management system, which includes a mix of the mechanical and biological methods of pest
18
control, and encourages the use of bio-pesticides.
Quality seeds is another input necessary for agricultural productivity, and good quality
55
seeds account for 20%-25% of increased crop productivity. Seeds are regulated by the
Seeds Act, 1966. The Act regulates the quality, production, and sale of seeds. The Seeds
Control Order, 1983 regulates the licenses to sell, export and import seeds. Three varieties
of seeds commonly used are (i) farm-saved seeds, which account for 65%-70% of the total
seeds consumption, (ii) commercially produced seeds of the breeder, foundation and
certified varieties, and (iii) genetically modified and hybrid seeds.
Agricultural seeds are produced by various agencies such as Indian Council of Agricultural
Research and its research institutions, state agricultural universities, and national and state
seeds corporations. The private sector has also started playing a role in supplying some seeds
such as hybrid maize, bajra, cotton and sunflower. Some of the challenges identified in the
development and distribution of quality seeds are (i) access to quality seeds, and (ii)
56
inadequate research support.
About 30%-35% of the total seeds available are produced by private and public sector
18
companies, and farm bred seeds account for the remaining seeds. While farmers can
develop certain varieties of seeds from the crops harvested on their land, high-yielding
varieties of seeds have to be purchased from the market. The cost of these varieties is too
high for marginal and small farmers to afford, thus disincentivising them from purchasing
43
these varieties. The Economic Survey 2015-16 has recommended bringing in more players
into the production of seeds, to improve their availability in the market and also reduce their
prices.
Food wastage occurs at all levels of farming- the farmer, transporter, wholesaler and retailer.
Some of the reasons for this wastage are crop damage, improper harvesting techniques, poor
packaging and transportation, and poor storage. Some of the issues with the state of storage
64
facilities in the country are inadequate capacity and poor conditions of storage. In cases
where the storage capacity is found to be sufficient, the conditions of the godown are unfit,
either because of the damp condition of the storage or because of its remote location.
Food grains from the central pool are stored in warehouses managed by the Central
Warehousing Corporation (CWC), under the Department of Food and Public Distribution. As
of December 2016, the CWC was operating 438 warehouses with a total capacity of 9.7
million tonnes. State Warehousing Corporations manage storage facilities at the state level.
As of December 2016, 19 such SWCs were operating 1,757 warehouses with a total capacity
65
of 26 million tonnes.
Another system for the storage of agricultural commodities is the negotiable warehousing
system, regulated by the Warehousing Regulatory and Development Authority. Under this
system, farmers who store their produce are issued a receipt with details of the location of
the warehouse, and the quality and quantity of the produce being stored. This receipt acts a
66
collateral in case the farmer wants to access agricultural credit. As of 2015, a storage
capacity of 118 million tonnes was with warehouses registered with the WRDA. Of this,
19 million tonne was with the private sector, 15 million tonne with the co-operative sector,
67
and the remaining with government storage.
Since foodstuffs such as certain fruits and vegetables deteriorate faster and lead to wastage,
68
they are stored at cold temperatures to reduce their perishability. Cold storage facilities in
the country were set up by the Cold Storage Order, 1964 under the Essential Commodities
Act, 1955. Some challenges identified in the development of cold storage in the country are
delays in the process of changing land use from agriculture to industrial use, lack of tax
exemptions accrued to cold storage for agricultural commodities, availability of power, and
69
accessibility to farmers.
19
Mega Food Parks
70
The Mega Food Parks scheme was launched by the Ministry of Food Processing Industries in 2008.
The scheme aims to create a mechanism of linking agricultural production to the markets, by
involving farmers, processors and retailers together in a cluster-based approach. Expected outcomes of
the scheme would be a higher price for farmers from their produce, creation of high quality food
processing infrastructure, reduction in food wastage, and creation of an efficient food supply chain,
among others. The scheme is being implemented through a Special Purpose Vehicle set up under the
Companies Act, 2013. As of July 2016, 42 mega food parks were sanctioned by
71
the Ministry, of which 38 have been approved for implementation and 8 are operational.
Agricultural Pricing
The largest procurement at MSPs is for rice and wheat. About a third of the wheat and rice
produced in the country is procured by the central government. In 2015-16, 33% of the wheat
and 30% of the rice produced in the country was procured by the central government. Note
that India is a big exporter of wheat; in 2014-15, of the 90.8 million tonnes of wheat
produced in the country, 28 million tonnes was procured for the central pool, and 29 million
tonnes was exported.
MSPs are the prices at which the central government purchases food grains from farmers.
MSPs are fixed by the central government in order to ensure remunerative prices to farmers.
Factors taken into consideration in determining MSPs include costs of cultivation and
73
production, productivity of crops, and market prices. High MSPs of crops provide
incentives to farmers to adopt modern technologies and farming practices, to increase the
overall productivity of their crops. The government announces MSPs for 22 crops (and a fair
and remunerative price for sugarcane), but the Public Distribution System, for which grains
are procured, primarily distributes wheat and rice to its beneficiaries. Since procurement is
mainly carried out for wheat and rice, farmers have focused on the cultivation of these crops
37
over other crops such as pulses and oilseeds. Table 17 in the Annexure shows the MSPs
for crops from 2005-06 to 2015-16.
Effectiveness of MSPs
Although MSPs are declared for various crops, procurement at these prices mainly happens
74
for wheat, rice, sugarcane and cotton, in a few states. As a result, in procuring states,
farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse
grains. MSPs are declared prior to each sowing season (in June and October) so that farmers
20
are aware of the minimum price the government will offer for their produce. This is meant to
74
encourage them to increase their investment in the production of crops. In a report to
measure the efficacy of MSPs, the NITI Aayog found that a low proportion of farmers (10%)
was aware of MSPs before the sowing season. 62% of the farmers were informed of MSPs
after sowing their crops. The pricing policy of MSPs would be effective only if farmers are
aware of it at the time of deciding what crops to grow. The NITI Aayog recommended that
the awareness level of farmers regarding MSPs must be increased and the mediums of
74
dissemination of this information must be strengthened.
Other issues with the implementation of the MSP regime include long distances to the
procurement centres, increasing cost of transportation for farmers, irregular hours of the
procurement centres, lack of coverage storage godowns and inadequate storage capacity, and
74
delays in the payment of MSPs to farmers. The NITI Aayog notes that the agricultural
pricing policy needs to be reviewed to ensure that farmers are receiving remunerative prices
for their produce. One of the measures it recommends is a price deficiency system. Under
such a system, farmers would be compensated for certain commodities if their prices fall
under a specified threshold. This would reduce stock-holding by farmers who store
commodities until prices increase, and also incentivise farmers to produce different crops.
Farmers would be paid by using the direct benefit transfer system, through bank accounts
linked to their Aadhaar numbers.
Agricultural markets
The production, supply and distribution of certain commodities comes under the purview of
75
the Essential Commodities Act, 1955. These commodities include food grains, oilseeds,
cotton and woollen textiles, jute, and coal, among others. Under the Act, the central
government may control the price at which any essential commodity is traded. It may also
regulate licenses for its storage, transport, distribution, disposal or consumption.
Agricultural markets in the country are regulated by state Agricultural Produce Marketing
76
Committee (APMC) laws. Under these state Acts, farmers are required to sell their
produce at state-owned mandis. Over the years, several issues have been highlighted in this
system. For instance, APMC mandis currently levy a market fee on farmers who wish to sell
their produce in the mandis. This makes it expensive for farmers to sell at APMC mandis. In
addition, farmers have to arrange for their produce to be transported from their farms to the
nearest mandi, which brings in costs such as transport and fuel. In transporting the produce
from the farm to the store, several intermediaries are involved. These intermediaries are all
paid a certain proportion of the price, as commissions. Thus the market price which the
farmer receives for his produce is significantly lower than the price at which his produce is
sold to the retailer.
77
The central government had released a Model APMC Act in 2003, to be enacted by states.
The Model Act (i) provides for the direct selling of produce through contract farming, (ii)
permits private persons, farmers and consumers to establish agricultural markets, (iii) levies a
single market fee on the sale of the commodity, and (iv) replaces licences with registration of
market agencies so that they can operate in more than one market, among other things.
21
Chapter-3 Agriculture Credit in India
AGRICULTURE CREDIT IN INDIA
The importance of farm credit as a critical input to agriculture is reinforced by the
unique role of Indian agriculture in the macroeconomic framework and its role in poverty
alleviation. Availability and access to adequate, timely and low cost credit from institutional
sources is of great importance especially to small and marginal farmers. All India Rural
Credit Survey Committee (1954) observed that “The credit fell short of the right quantity,
was not of the right type and did not serve the right people”. The flow of credit to the
agriculture sector failed to exhibit any appreciable improvement due mainly to the fact that
commercial banks were not tuned to the needs and requirements of the small and marginal
farmers, while the co-operatives, on the other hand, lacked resources to meet the expected
demand. The finance to agriculture is broadly in two parts direct and indirect it is later in
which more emphasis has been and thus direct support to agriculture has been minimal. All
India Rural Credit Survey (AIRCS) has confirmed that formal credit institutions provided
less than 9% of rural credit needs in India. Money lenders, traders and rich landlords
accounted for more than 75% of rural credit.
Structure of Agriculture Credit system in India
GOVERNMENT OF INDIA
NABARD
RURAL CO-OPERATIVE
COMMERCIAL REGIONAL RURAL
CREDIT INSTITUTIONS
BANKS BANKS
22
Government has increasingly begun to tap institutional finance from banks and other
term lending institutions for financing various developmental programmes in the State in
view of the need to supplement plan financing. Banks in the State have also played a pivotal
role in this regard. However, credit should be utilized in prudent manner to
maximize returns and spread the benefit over wider sections of the population. Successful
implementation of socioeconomic developmental programmes calls for effective co-
ordination between financial agencies and government departments. It also helps in
improvising efficiency of resource allocation & identifying infrastructural gaps. The State
Level Bankers’ Committee, constituted by the Reserve Bank of India under the Lead Bank
Scheme periodically takes up the review performance and monitors progress under special
schemes. At the district level the District Consultative Committee
with the Chief Executive Officer of Zilla. Panchayat as chairperson and representatives
of financial institutions and Heads of Government departments at the district level as
members monitors the implementation of government sponsored schemes & Service
Area Credit Plans. At the block level, Block Level Bankers’ Committee chaired by Lead
District Manager with bank managers and departmental heads of government at
block level as members periodically reviews the implementation of government
sponsored schemes & Service Area Credit Plans and sorts out problems encountered
in the implementation of various programmes. In order to select & prioritise the works for
loan assistance from National Bank for Agriculture and Rural Development (NABARD)
under Rural Infrastructure Development Fund(RIDF) Scheme, launched in
1995-96, a Cabinet Sub-Committee on RIDF has been constituted under the chairmanship
of the Minister for Public Works. There is also a High Power Committee chaired by the
Additional Chief Secretary and Development Commissioner for reviewing the
implementation of RIDF projects. These policy measures have resulted in the increase in
the share of institutional credit of the rural households.
23
up to 54 percent. At present, they are the largest source of institutional credit to agriculture.
In 2004-05 these banks have accounted Rs 81,481 crore (65 percent) in agriculture credit next
year 2005-06 it was Rs. 1,25,859 crore (70 percent). In the year 2006-07 commercial banks
supply of credit falls down and reached at Rs. 1,00,999 (67 percent). This fluctuation in
commercial bank supply was continuing till the year 2012-13 in this year commercial banks
share in credit was Rs. 4,31,543 crore (68 percent).
Progress in regard to flow of agricultural credit is given below:
24
13. Total supply was Rs. 95,565 crore and this amount was 18 percent of total agriculture
credit.
Regional Rural Banks were created as a public banking institution in 1974 to cater to the
credit needs of marginalised sections of rural population including small and marginal farmers.
Regional Rural Banks are guided by priority sector lending policy of providing credit to various
deserving sectors/sections including agriculture and allied activities. RRBs were set up in those
regions where availability of institutional credit was found to be inadequate but potential for
agricultural development was very high. However, the main thrust of the RRBs is to provide
loans to small and marginal farmers, landless labourers and village artisans. These loans are
advanced for productive purposes. The numbers of RRBs in the country as on 31 March 2014
were 57, with a network of 19,082 branches covering 642 notified districts in 26 States and
the UT of Puducherry. In the year 1990-91 share of commercial banks increased up to 0.6
percent. At present, they are in important source of institutional credit to agriculture. In 2004-05
these banks have accounted Rs. 12,404 crore (10 percent) in agriculture credit next year 2005-06 it
was Rs. 15,223 crore (8 percent). In the year 2006-07 RRBs supply of again reached at Rs.15, 170
crore (10 percent). Next year this trend was continuing and share was Rs. 17,187 crore (10 percent).
This fluctuation in Regional Rural banks supply was continuing till the year 2012-13 in this
year commercial banks share in credit was Rs. 73,856 crore (14 percent).
The flow of agriculture credit in 2004-005 reached Rs.1, 25,309 crore (as against
target of Rs. 1,05,000 crore) and next year 2005-06 it reached Rs. 1,80,486 crore in this year
credit target was Rs.1,41,000 crore that means 39,486 crore was extra supply to agriculture .
in the year 2006-07 credit supply target was Rs.1,75,000 and achieved Rs. 2,29,400 crore. As
against the target of agriculture credit for 2012-13 of Rs.5, 75,000 crore, the achievement
during the year has been Rs.6, 07,375 crore. For the year 2013-14, the target of agriculture
credit flow has been increased to Rs.7, 00,000 crore and achieved Rs. 7, 38,615 crore.
Agriculture credit reached from 1, 25,309 crore to 7, 38,615 crore between the years2004-05
25
to 2013-14 in this 10 years, this amount increased by 590 percent and almost 6 fold. This is
the remarkable achievement in the agriculture credit.
The Kisan Credit Card (KCC) Scheme introduced in August 1998 has since
stabilized, with major share of crop loans being routed through it. Besides the existing
facilities of providing crop loan, the scope of KCC scheme has been enlarged to include term
loans for agriculture and allied activities and a reasonable component to meet the
consumption needs. Further, to provide adequate and timely credit support from the banking
system to the farmers for their cultivation needs and to improve farmers’ accessibility to bank
credit for production purposes, the credit delivery mechanism is being simplified and more
flexibility in the use of credit Kisan Credit Card (KCC) is being introduced. Kisan Credit
Card has made rapid progress with the banking system issuing more than 435 lakh cards with
cumulative credit of Rs 1,11,459 crore sanctioned up to September 30, 2004( NABARD,
2005). The number of live KCCs issued by commercial banks, cooperative banks, and
regional rural banks reached 10 crore, while total loans outstanding amounted to 5, 34,681
crore in March 2013.
26
The moneylender’s grip over the rural economy
One such weakness in the rural economy is the high dependence on moneylenders, who charge
usurious rates of interest. Except for the top three decile classes in terms of assets, the percentage
of rural households indebted to non-institutional agencies is higher than those who borrow from
formal sources such as banks, other financial institutions and self-help groups.
The burden of debt from non-institutional sources is typically high because of the exorbitant
interest rates. As much as 69% of all non-institutional finance is given at interest rates of 20%
and above.
27
Farm credit has grown sharply
The high dependence on non-formal sources of credit has persisted despite a sharp increase in
the credit intensity of agriculture. Over the past decade, agricultural credit as a share of
agricultural gross domestic product has risen exponentially.
28
Bank credit is not reaching small farmers
Although aggregate credit intensity of agriculture is rising, small and marginal farmers (who
make up 85% of rural households) have not benefited much, economists R. Ramakumar and
Pallavi Chavan pointed out in a 2014 research paper. Urban and metropolitan areas have seen
a sharp spike in disbursal of farm loans. Further, there has been an increase in the share of
larger-sized loans since 1991.
Worryingly, the larger loan size has not translated into productive investments in agriculture.
There has been a sharp fall in the share of long-term credit in total agricultural credit over the
past two decades. “Consequently, the portion of agricultural credit that was used for fixed
capital formation in agriculture became smaller,” wrote Ramakumar and Chavan.
The lack of private investments in agriculture has been compounded by a declining share of
investments in public spending on agriculture. Rising subsidies, which offer short-term relief
but do not help long-term growth, have crowded out public investments in agriculture. GFC
(Public) in the chart refers to gross fixed capital investments in agriculture by the
government.
29
30
Chapter-4 Impact of Demonitisation on
Agriculture Sector
In 2016, Agriculture sector was expected to witness high growth, about 6 per cent, in output
and farmers’ income, after two years of poor performance due to back to back droughts.
Already, kharif season, which accounts for about half of the annual crop output, showed
moderate to very high increase in output of various crops. However, doubts have been raised
about significant revival of agriculture growth this year due to effect of demonetization.
Tentative estimates of area sown are provided by Ministry of Agriculture each Friday of the
week. This data shows that up to November 11, which can be considered as start of
demonetization, Rabi sowing was completed on 14.6 million hectare area which was 5.7 per
[4]
cent lower than the normal crop coverage. As of November 2016, 79 lakh hectares of
[4]
land is under rabbi cultivation (an increase of 8.8% since the year 2015) and only 20% of
the sowing have been completed in crop producing states like Maharashtra, Punjab, Gujarat,
Tamil Nadu and Karnataka.
The gap between area sown this year and normal area steadily declined almost every week
since the announcement of demonetization. During the week ending 30th December, 2016,
net sown area under rabi crops exceeded the normal area by 2.77 per cent and area sown last
year by 6.86 per cent. The data on progress of sowing of rabi crops clearly indicate that, at
country level, there is absolutely no adverse effect of demonetization as for as sowing of
major crops is concerned.
There was a delay of 1-2 weeks in sowing in the beginning of Rabi season but it picked up
pace subsequently. Normally Rabi sowing is completed on 88 per cent area by 30th
December. This year it has been completed on more than 91 per cent area. The major reasons
for the delay in sowing of Rabi crops as perceived by the farmers were – delay in input procurement;
difficulties in labour hiring; unavailability of formal or informal credit in cash; provision of currency
for household purpose and general distress in the economy. However, the farmers have also adopted
31
different mechanisms to cope up with the cash crunch situation and to minimise the impact on
farming in the spell of demonetization. The common management strategies which worked well to
mitigate the severity of the adverse effects of demonetization are - use of own seeds, fertilizers and
stock of agrochemicals; use of more family labour; co-operative farming practices to deal with labour
scarcity during sowing; borrowing the agro-inputs from the friend or purchased the inputs on credit
from private traders
Crop pattern:
The progress in area sown remained uneven across regions and crops. Wheat, which accounts
for 47 per cent of total area under reported rabi crops, showed a big 2 shortfall of 41 per cent
in area at the time of demonetization. The gap declined to less than 1 per cent by mid-
December, 2016 and crossed normal area by 2.12 per cent by the end of December.
Compared to the corresponding period last year wheat is sown on 7.7 per cent higher area.
Area under pulses and oilseeds is higher than normal for the corresponding period by 11.2
and 1.7 per cent respectively. The shortfall in area is reported for rabi rice and course cereals.
This shortfall is much smaller (6.6 lakh hectare) compared to the gain in area under wheat,
pulses and oilseeds (22.3 lakh hectare) resulting in net increase in area under rabi by 15.7
lakh hectare over normal area and 37.4 lakh hectare over last year.
Among major rabi crops growing states, overall shortfall in sown area is about 20 per cent in
Tamil Nadu and Karnataka and 8 per cent in Gujarat and Andhra Pradesh. Similarly, J&K
and Himachal Pradesh also show major deficit in rabi sowing. Largest shortfall is seen in
Kerala. 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:
Farmers use cash to buy quality seed, fertilizers, chemicals and diesel and to hire labour and
machinery. As Rabi season crops are mainly self-pollinated, farmers need not buy fresh seed
in rabi season every year. More than 70 per cent seed used in rabi crops is self-produced and
rest is purchased from public sector agencies, research institutes and private sources. Sale of
seed this year by public institutions is reported to be much lower than normal sales. This can
have small impact on productivity.
The major impact on productivity is going to happen due to change in use of fertilizer.
Representative data on fertilizer use/consumption by farmers comes with a time gap.
However, Ministry of Agriculture maintains Fertiliser Monitoring System which indicate first
point sale of fertilizer. According to this source, fertilizer off take during the current rabi
season (till 21 December 2016) was lower than the fertilizer off take in the corresponding
period during 2014-15 and 2015-16 by 7.47 per cent and 7.0 per cent. These are very raw
statistics and subject to correction as per the sale figures reported by various fertilizer
companies. Also, as on date, fertilizer takeoff statistics are not inconsistent with the area
statistics.
32
If fertilizer use at farm level faces the similar shortfall as reported in fertilizer sales at first
point, it will affect productivity. According to a study by Ramesh Chand a 1 per cent
increase/decrease in fertilizer use result in 0.1 per cent increase/decrease in GDP agriculture
and about 0.14 per cent increase/decrease in crop output. Based on this, it is estimated that
current shortfall in fertilizer consumption if it persist till the end of 3 rabi season, which
constitutes half of annual agricultural output, can result in 1.05 per cent decline in crop output
and 0.75 per cent decline in agricultural output.
Effect on Prices:
No effect of demonetization was seen on prices of major crops like paddy, soyabean, and
maize in the month of November and their wholesale prices in APMC mandis of the country
were around 3 per cent higher in November as compared to the month of October. However,
prices of maize and soyabean fell in the month of December but paddy prices ruled
higher than previous two months and also as compared to last year. There might be
some delays in payment to the farmers due to cash crunch but that is a temporary
phenomenon.
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 per cent lower compared to the month of October, respectively.
These changes indicate that incomes of producers of perishable commodities have suffered
due to fall in prices in the month of November.
Loss to total revenue of crop sector was estimated by multiplying monthly value of output of
fruits and vegetables with the difference in the prices between October and November in
APMC markets. This loss comes to 0.13 per cent of value of output of crop sector for one
month and 0.26 per cent. Prices of some of the perishables crashed in the month of
December. The main reason for this was found to be the glut in market.
According to the data available on Agmarknet website, daily arrival of tomatoes in mandis of
Madhya Pradesh in December 2016 was 54 per cent higher than November 2016 and four
times the market arrivals during December, 2015. Average daily arrival of tomatoes in
mandis of Maharashtra was 48 per cent higher in the month of December and 51 per cent
higher in the month of November 2016 as compared to the same months in year 2015. Thus,
seasonal glut and bumper crops seem to be the major reasons for crash in vegetable prices in
the month of December 2016 in some states.
It is difficult to ascertain how much fall in prices of perishables during the month of
December 2016 was due to glut in arrival and how much could be due to any disruption due
to demonetization. Because of this it is assumed that losses to farmers were similar to those
of month of November which will raise the total loss during the months of November and
December to 0.26 per cent. 4
33
Effect on Output Growth
The situation prevailing at the end of December 2016 implies that rabi crop output will
increase by 6.02 per cent over last year due to higher area sown. Lower use of fertilizer, as
observed from the first point sale, can cause 1.06 per cent decline in output of rabi season.
These two factors put together imply that rabi output in 2016-17 could be 4.96 per cent
higher than 2015-16.
Lower sale of quality seeds due to cash crunch can also affect growth but this impact is
expected to be small. Other variable that can affect productivity and output growth is
temperature in the forthcoming months of February and March.
Area sown in kharif season in the current year was 3.5 per cent higher than previous year.
Level of productivity this year is estimated to be much higher than last year due to normal N-
W monsoon rainfall in year 2016. As a result production of kharif crops this year was
substantially higher than 2015-16. According to the first advance estimate for year 2016-17
the increase was 57.0% in pulses, 40.8% in oilseeds, 19.4% in coarse cereals, 6.7% in cotton
and 2.8 per cent in paddy.
Sugarcane production in 2016- 17 is estimated to be 13.3 percent lower than 2015-16. These
changes sum up to 10 percent increase in kharif output over the last year. Based on above
changes the growth rate for crop sector, which constitutes 62.3 percent of value of output of
total agriculture, for the whole year is projected to be 7.48 percent, if there is no severe shock
to crops during Feb –April, 2017.
Livestock, which constitutes 26 percent VAO is likely have normal growth of 5.6 per cent.
Fishery is projected to have at least same growth (4.8%) as last year and forestry is assumed
to have negative growth of 1 per cent like previous year. The growth rate in all the four sub
sectors ie crop, livestock, fishery and forestry, add up to 6.04 per cent.
The growth rate in farmers’ income is projected to be slightly lower due to drop in
prices of perishables during the months of November and December.
Demonetization has certainly been reflected in the slashed estimates for GDP of the third
quarter by the banks.
34
Chart 1- Source: Media Report, CARE
CRISIL, who has mapped the agrarian growth to the gross domestic product (GDP) predicted
that a sub-normal monsoon, like the previous two years, shall keep the GDP around the 7.3%
[2]
growth mark . Demonetization is being regarded as the third year of low monsoon due to
its similar effect with regard to production and consumption despite 2016 being a year of
normal rainfall.
Now, going by this co-relation, and corroborated by the report of the Planning Commission
we can expect the Indian GDP to remain in the sub 7.3% range which is lower than the
projected growth for 2016 of 7.6% by the International Monetary Fund. A trend analysis of
the same also confirms the deviation that the Indian GDP faces.
35
Projected GDP of 2016- QoQ
This cycle can possibly take almost two to three quarters to stabilize as the GDP growth in
the third quarter (September-December 2016) and the first quarter of 2017 (January-March
2017) can be significantly lower than expected. Another factor to be noted is the lower rural
income in these quarters due to losses incurred.
This shall significantly reduce the consumption factor in the GDP function-
GDP = C + I + G + NX
Continuing with the food supply shock, the lowered agricultural production shall promote
imports and cause a trade deficit in the BOP account. The increased imports shall depreciate
the Indian Rupee further than the current Rs.68.31 per dollar. Note again that this already is
close to the all-time low of 68.85 per dollar. This can mean increased cost of other imports
too. The major Indian imports include crude petroleum, gold, coal briquettes, diamonds and
petroleum gas among other things. Crude petroleum, coal, etc. are the prime drivers for
almost every industry. An increased cost for these shall put an upward push on the Producer
Price Index (PMI) which will eventually trickle down to the Consumer Price Index (CPI).
36
Effects of food supply shock
References:
1. Madan Sabnavis. First Post (November 21, 2016) [Blog Post]. Demonetization: A painful shift
in rural economy. Retrieved from http://www.firstpost.com/business/demonetisation-a-
painful-shift-in-rural-economy-all-will-be-well-by-rabi-season-3116052.html
2. Waghmare A. FirstPost (2017, January 6) [Blog post]. Demonetization will hit agriculture,
informal sector workers. Retrieved from http://www.firstpost.com/india/demonetisation-will-
hit-agriculture-informal-sector-workers-the-most-study-3106004.html
3. Planning Commission of India (2014, December 22). Agriculture GDP Projections (p. 43).
Retrieved
from http://planningcommission.gov.in/data/datatable/data_2312/DatabookDec2014%2045.pd
f
4. Kohli R. LiveMint (2016, November 22) [Blog post]. Demonetization: The impact on
agriculture. Retrieved from
http://www.livemint.com/Opinion/B1vFTOgwqHjdM5nkmg2CxJ/Demonetization-The-
impact-on-agriculture.html
5. Chand R and Singh NITI Aayog (2016, November) [Blog post]. Agricultural growth in the
aftermath of demonetization. Retrieved from http://niti.gov.in/content/agricultural-growth-
aftermath-demonetization
6. CRISIL Outlook Fiscal 2017 (2016, December). A year of reckoning beckons. Retrieved from
http://www.crisil.com/pdf/economy/CRISIL-Outlook-Fiscal-2017.pdf
7. Counterview (November 21, 2016) [Blog Post]. Short term and medium term impact of
demonetization. Retrieved from https://counterview.org/2016/11/21/short-and-medium-term-
impact-demonetisation-shock-is-expected-to-have-on-indian-economy/
8. Nidhi Nath Srinivas, The Huffington Post (2016, November 17) [Blog post]. How
demonetization has affected India’s agriculture and food. Retrieved from
http://www.huffingtonpost.in/nidhi-nath-srinivas/how-demonetisation-has-affected-indias-
agricultural-and-food-ma/
9. Dr Rao K, Dr Mukherjee S, Dr Kumar S, Mr Sengupta DP, Mr Tandon S and Mr Nayudu H
(2016). Demonetisation: Impact on the Economy. National Institute of Public Finance and
Policy (Working paper no. 182)
37
Chapter-5: Data analysis and interpretation
For the present study data from three different classes of farmers (i.e. large farmers, medium
farmers and small farmers); and four different income class of consumers were collected.
The results of the study are categorized into three groups i.e. impact on activities farmers;
impact on activities of traders and impact on the consumption activities of the consumers.
The decision to demonetize the high currencies came in such a time when the farming
fraternity of the country was either engaged in the post-harvest operation of Kharif crops and
sowing of Rabi crops. Both these operations require a huge amount of cash for its conduct.
Thus, the decision to demonetize at this time has affected the farming community worst as
compared to the two earlier instances of demonetization which occurred in the month of
January when most the major agricultural operations are generally completed. Apart from
these, the farmers faced problems in receipt against the sale of their Kharif produce. This
section highlights the impact on the sowing of Rabi crops; availability of casual labour;
access to agricultural inputs and on the sale of Kharif crops by the farmers.
Out of the total farmer respondents, 65 percent of the farmers in the sample reported for the
delay in sowing of the Rabi crop due to demonetization. Out of different categories of the
farmers, small farmers were most affected followed by medium and large farmers table 3.
The further analysis of data suggest that out of 65 percent affected farmers, small farmers
constituted 54% followed by medium farmers (38%) and large farmers (8%).
The government of India has announced the provision of using high denomination demonetized
currencies for the procurement of the agricultural inputs (seeds, fertilizers and agrochemical) to
farmers from the government agencies. However even then only 70 percent farmers in our sample
were aware of using this provision. It was also found that out of 70 percent aware farmers, only 43
percent could utilise it. The major reason for lesser utilisation was – uneven and distant location of
government agro-input agencies. Contrary to this, Chand and Singh (2017) has reported that as the
most of the Rabi crops are self-pollinated, farmers need not buy fresh seeds every year and due to
which the sale of seed this year by public institutions is reported to be much lower than normal sales.
However, the farmers in our study were affected as far as access to the inputs is concerned Table 5. 38
Out of sampled farmers none of them have used either cheque or any of the digital payment gateways
for procurement of inputs; however, the usage of a cheque for input procurement was in news in many
parts of the country
The present study has compiled the data from Agmarknet website on arrival and price of
cereals (Paddy), vegetables (cauliflower) and fruits (apple and oranges) in APMC Narela &
Azadpur, New Delhi to analyse the effect on the trading activities of farmers and traders in
the major markets of Delhi. The result shows that there was no effect of demonetization on
the price of paddy. The price of paddy has followed an increasing trend even after the
demonetization. The similar results were also reported in their study. However, the arrival in
the market has slumped down after the second week of November i.e. with the announcement
of demonetization in the country Figure 3.However, the perishables like fruits and vegetable’s
price and arrival have dropped post demonetization. The wholesale price of vegetable
(cauliflower) and fruits (apple & oranges) has declined is shown in Figure 4, 5 & 6 resulted in
the loss of income to the cultivators. But the demonetization alone can’t be blamed for
declining prices of the perishables as the good monsoon this year has pushed up supply this
year which is also an important reason for declining price. It is difficult to ascertain how
much fall in prices of perishables during the month of November & December 2016 was due
to a glut in arrival and how much could be due to any disruption due to demonetization.
39
40
The response of farmers shows that the small and marginal farmers were most affected again
as far as the sale of agricultural produce is concerned and the large farmers were least
affected in our study
The farmers have reported that they have faced the problems like delayed payment for
produce, payment in parts, absence of aggregators in the village for a while, the absence of
transportation, bumper harvest and unavailability of adequate storage infrastructure. The
prices in consumer markets are higher, but in villages there are no buyers for the harvested
crop. Inventories of commodities are piling up due to lack of buyers in the village market.
Incidence of delay in payment to the producers in the market was also reported. However,
they have managed the situation by retaining the non-perishable produce and delayed sale,
sold perishables at a lower price, accepted payment in cheque, and sold perishables at debit,
accepted half payment on the spot and remaining later to minimize their losses in the cash
crunch period due to demonetization
c) Effect on access to credit to farmers: RBI data show that lending to rural
India was badly affected. Growth in rural loans between 30 September 2016 and 31 March
2017 was a mere 2.5%. Compare that with the growth of 12.9% in the second half of 2015-16
and the extent of the slowdown becomes clear (chart 1).
41
There is little doubt that the note ban hurt rural India and that, as at end-
March, loan growth was far below its pre-demonetization levels.
42
second half of FY17 was very abnormal and may be attributed largely to
Demonetisation.
How much of this deterioration in rural lending was due to the public
sector banks? Many nationalized banks are in no position to lend, saddled
as they are with bad loans. In fact, nationalized banks saw their lending to
rural India grow by a mere 0.5% in the second half of FY17.
A year ago, in the second half of FY16, nationalized banks had increased
their lending to rural India by 13.3%. The sharp deceleration in rural
lending by public sector banks is bad news for the remoter parts of rural
India, as it is the public sector banks which take care of the credit needs of
these places. Lending by State Bank of India and its associates to rural India
during the second half of FY17 too grew by a mere 0.6%. Chart 2 has the
details.
But it isn’t true that private sector bank credit to rural India was unaffected. True, private
sector banks saw their rural credit rise by a decent 14.6% in the second half of FY17. But this
was on a low base, compared to the public sector banks. What’s more, private sector bank
credit to rural India had gone up by as much as 28.4% in the second half of FY16. In other
words, growth in private sector bank credit to rural India halved after Demonetisation. While
it is true that bank credit in India was limping even before Demonetisation, the note ban
crippled it.
Lending to rural India was the most affected, but other parts of the country also saw a
deceleration in credit growth. In the second half of FY16, growth in bank credit to semi-urban
India, urban India and metropolitan India was 11.9%, 11.2% and 12.3% respectively. In the
second half of FY17, growth had slowed to 6.4%, 6.1% and 5.5% for bank lending to
43
semi-urban, urban and metropolitan India respectively. Overall bank credit growth in the
second half of FY17 fell to 5.4%, less than half the 12.2% rate of growth for the second half
of FY16.
Which group of banks was the most affected? Nationalized banks’ credit growth was 2.7% in
the FY17 second half, compared to 8.8% growth in second half FY16. SBI and its associates
saw their credit growth fall to 7.8% in the second half of FY17 compared to 13.7% in the
second half of the previous year. Private banks’ credit growth was 10.1% in the second half
of FY17 compared to 18.8% in the year-ago period. Clearly, every category of banks was
affected.
Which regions were the most affected? The rural parts of western India bore the brunt, with
credit growth falling by 5.1% in the second half of FY17. Rural northern India and
metropolitan western India also saw very low credit growth.
Food Inflation: Food inflation declined from 3.7 per cent (year-on-year, y-o-y) in
October 2016 to 2.6 per cent in November, to 2.0 per cent in December and further to 1.3 per
cent in January 2017. This was mainly on account of vegetables and pulses. Vegetable prices
declined by 6.2 per cent on a month-on-month (m-o-m) basis in November 2016 and further
by 11.7 per cent in December 2016. The vegetable price decline continued in January 2017
albeit at a lower rate of 4.7 per cent. Pulses prices declined by 7.4 per cent between October
2016 and January 2017. The sharp decline in prices of pulses and vegetables was due to a
number of factors.
In the case of pulses, there was a record production of kharif pulses of 8.7 million tonnes due
to good monsoon aided by favorable weather conditions. Adequate provision of quality
seeds, fertilizer and pesticides, and timely hike in minimum support prices also provided
suitable incentives. The record level of production, achieved after two consecutive years of
monsoon and crop failures, helped in sharp reduction in prices of pulses, in as much as prices
crashed even below the minimum support prices (MSPs) in some of the mandis.
During the November-January period every year, vegetable prices usually exhibit seasonal
moderation; however, during this season, the decline in prices was more pronounced than
what was seen during the corresponding periods of previous years. The seasonal decline in
prices seen in CPI vegetables is primarily driven by potato, onion and tomato which together
constitute a substantial share of CPI vegetables sub-group weight (at around 40 per cent of
the vegetables index). During November 2016 to January 2017, while seasonal moderation
was seen for potato and tomato prices, there was also a broad based decline in prices across
44
vegetables such as cabbage, cauliflower, palak/other leafy vegetables, brinjal, gourd, peas
and beans, which usually contribute little to the observed seasonal moderation in CPI-
vegetables (Chart 1). The large arrival of fresh winter crop, given good moisture content in
soil following normal monsoon, contributed to the larger than usual seasonal fall in
vegetables prices. As the transactions in fruits and vegetables have always been cash
intensive, following demonetisation, as cash ran dry, there was some compression in demand
for fruits and vegetables. Anecdotal evidence also pointed to some distress sales by farmers,
given the perishable nature of green vegetables and fruits. On the whole, demonetisation
induced supply chain disruptions, which could have pushed up prices, seemed to have been
more than counteracted by demand compression and distress sales of vegetables.
The sharp decline of about 240 bps in food inflation between October 2016 and January 2017
reflected the combined impact of record pulses production, large winter arrivals of vegetables
and compression in demand due to Demonetisation. This was despite large unfavorable base
effects.
Daily retail prices data, as monitored by the Ministry of Consumer Affairs, Food and Public
Distribution, for the month of February 2017 suggest that the rate of decline in prices of
vegetables has moderated considerably. While onion and potato prices have continued to
decline, tomato prices are picking up (Annex Table 3). This is also broadly corroborated by
the movement in fortnightly food prices monitored by the Reserve Bank (Annex Table 4).
Thus, in the case of vegetables, there are some incipient signs of prices getting stabilized.
Prices of pulses continued to register significant declines in February. Prices of cereals on the
other hand, registered an increase. Hence, the overall food inflation trajectory in the near-
term would also be determined by evolving pulses deflation and cereal price movements
45
46
e) Marginal farmers are the most hit section of farmers due to
Demonitisation: The response of farmers shows that the small and marginal farmers
were most affected again as far as the sale of agricultural produce is concerned and the large
farmers were least affected in our study
47
The farmers have reported that they have faced the problems like delayed payment for
produce, payment in parts, absence of aggregators in the village for a while, the absence of
transportation, bumper harvest and unavailability of adequate storage infrastructure. The
prices in consumer markets are higher, but in villages there are no buyers for the harvested
crop. Inventories of commodities are piling up due to lack of buyers in the village market.
Incidence of delay in payment to the producers in the market was also reported. However,
they have managed the situation by retaining the non-perishable produce and delayed sale,
sold perishables at a lower price, accepted payment in cheque, and sold perishables at debit,
accepted half payment on the spot and remaining later to minimize their losses in the cash
crunch period due to demonetization
The national accounts data shows we now have deflation in the agriculture sector, which
means falling prices for farm produce. Inflation according to the GVA deflator in agriculture
48
was a negative 2% in the June 2017 quarter. This is why farmers have been so restive.
Demonitisation has certainly contributed for this deflation in Agriculture.
Impact on GDP:
India’s economic growth slowed for the fourth consecutive quarter in the three months ended
March, mirroring the impact of demonetization on key sectors including construction and
financial services.
Gross domestic product (GDP) growth slowed to 6.1% in the fiscal fourth quarter from 7% in
the third, according to data released by the government
Real gross value added (GVA), another measure of economic activity that is arrived at
by excluding net indirect taxes from GDP, slowed to a growth pace of 5.6% in the March
quarter, also the fourth consecutive quarterly decline.
49
Chart 1 shows the depth of the slowdown, with growth in both gross domestic product (GDP)
and gross value-added (GVA) at constant prices steadily falling from the June 2016 quarter.
The fact that growth started tapering before demonetization indicates the economy was
already weakening before the demonetization shock hit it.
The growth numbers reflected the lingering effects in the March quarter of the government’s
demonetization of high-value banknotes with effect from 9 November, which triggered a cash
crunch and disrupted business, especially in the unorganized sector. The labour-intensive
construction sector contracted as a result of the cash shortage and regulatory changes, and
financial services grew at an anemic single-digit pace.
The distinct downtrend in GDP growth over the four quarters of FY17 suggests that the
slowdown in growth that had already set in had been intensified by the note ban
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Chapter-6 Observations from the field:
The following observations were made from the primary data which was based
on the includes the views expressed by the 28 farmers from the Vadlamuru
village, Atchutapuram village of Kapileswarapuram Mandal, East Godavari
District and 12 farmers from the Ulichi village, Prakasam District of the state of
Andhra Pradesh.
7) The farmers have reported that they have faced the problems like delayed payment for
produce, payment in parts, absence of aggregators in the village for a while, the
absence of transportation, bumper harvest and unavailability of adequate storage
infrastructure.
8) The prices in consumer markets are higher, but in villages there are no buyers for the
harvested crop.
9) Inventories of commodities are piling up due to lack of buyers in the village market.
Incidence of delay in payment to the producers in the market was also reported.
However, they have managed the situation by retaining the non-perishable produce
and delayed sale, sold perishables at a lower price, accepted payment in cheque, and
51
sold perishables at debit, accepted half payment on the spot and remaining later to
minimize their losses in the cash crunch period due to demonetization
1) An exercise of this scale impacting the entire population of the country must be
properly planned and farmers being the vulnerable community should have given
importance while distributing new currencies.
2) Financial institutions like NABARD, RRBs failed to support the farming community
during Demonitisation period. The government should have taken necessary and
timely action in safeguarding the farming community.
3) The price drop of the perishable commodities and the cash crush caused by the
Demonitisation has forced hundreds of farmers to throw away their hard earned
produce on roads. The government should have taken necessary action for the benefit
of farmers.
4) Neglecting the former RBI governor Rangarajan’s caution against demonetization,
and not engaging the economists while implementing an exercise of this magnitude is
proved to a disaster and absolutely no positive outcomes while troubling billions of
population. Hence the government should have engaged the experts prior and planned,
implemented in a better fashion.
Conclusion:
The action of the Indian government to eradicate the four social problems- black money,
corruption, counterfeiting and terrorist funding was a very bold move but it definitely
affected the many parts of the economy and in particular the agriculture.
Among the farmers, small farmers were worst hit by this big bang experiment while in grain
markets wholesalers and in fruits and vegetable markets retailers were most affected
categories. The low-income strata of society and those who did not use any online purchase
options were most affected by demonetization.
Despite the fact that the demonetization has affected almost all economic agent in one or
other way but they feel that the situation is returning to normal now. However, the
government has provided support to the farmers to use the old denomination currency for
purchase of agricultural inputs so that their operation may not get affected but inadequate
spread and small network of government input agencies and insufficient penetration of
formal credit institutions and inadequacy of cash in most of the rural bank branches were
some of the pitfalls of the government that has affected the agriculture. However, the level of
production and productivity and monsoon in 2016-17 was recorded higher than 2015-16.
52
At the end of February, the markets have shown the sign of revival and most of the
stakeholders in our study (i.e. farmers, traders and consumers) have also felt that the system
has shown resilient capacity and regaining its normalcy. Though many of the operations
linked to agriculture have affected in short term, but the macroeconomic picture of
agriculture doesn’t show any slump in growth. But, it would be too early to say about the
long-term impact of demonetization on agriculture as the production and yield data on Rabi
crops is yet to appear. However, in short run, there is no significant impact of demonetization
on farming as the markets and farming operations showing the sign of recovery.
53
Bibliography
Demonetisation and Black Money: C. Rammanohar Reddy, 2017
Demonetisation: The Economists Speak, 2017
From Lehman to Demonetization, 2017
https://rbi.org.in/scripts/PublicationsView.aspx?id=17447
54
Annexure
Table 6: Number of land holdings in states according to size in 2010-11 (in 100 hectares)
Marginal Small Semi-medium Medium Large
State All holdings
(< 1 ha) (1-2 ha) (2-4 ha) (4-10 ha) (> 10 ha)
Andaman and Nicobar Islands 46 24 31 16 0 118
Andhra Pradesh 84,247 29,184 13,991 3,973 357 1,31,751
Arunachal Pradesh 215 193 340 279 65 1,093
Assam 18,311 4,966 3,035 849 41 27,202
Bihar 1,47,441 9,480 4,147 815 31 1,61,914
Chandigarh 5 1 1 0 0 7
Chhattisgarh 21,828 8,311 5,030 2,018 277 37,465
Dadra and Nagar Haveli 82 39 18 7 1 147
Daman and Diu 77 5 1 0 0 84
Delhi 113 45 30 15 2 205
Goa 599 98 57 20 6 780
Gujarat 18,156 14,290 10,795 5,127 488 48,856
Haryana 7,781 3,148 2,838 1,947 458 16,173
Himachal Pradesh 6,704 1,746 849 276 33 9,608
Jammu and Kashmir 12,066 1,671 637 114 5 14,494
Jharkhand 18,483 4,289 2,828 1,287 202 27,089
Karnataka 38,488 21,382 12,668 5,107 676 78,322
Kerala 65,797 1,802 570 120 19 68,308
Lakshadweep 99 3 1 0 0 103
Madhya Pradesh 38,910 24,487 16,548 7,891 887 88,724
Maharashtra 67,090 40,523 21,591 7,106 679 1,36,990
Manipur 767 222 28 0 1,506 -
Meghalaya 1,027 578 405 83 2 2,096
Mizoram 502 298 99 17 3 919
Nagaland 65 203 485 780 252 1,784
Odisha 33,683 9,186 3,113 637 56 46,675
Puducherry 285 28 14 4 1 332
Punjab 1,644 1,954 3,245 2,985 697 10,526
Rajasthan 25,115 15,111 13,351 11,271 4,036 68,884
Sikkim 405 169 108 59 8 749
Tamil Nadu 62,666 11,813 5,023 1,506 174 81,182
Tripura 4,991 550 215 28 1 5,785
Uttar Pradesh 1,85,323 30,353 13,343 3,983 253 2,33,255
Uttarakhand 6,721 1,573 648 173 11 9,127
West Bengal 58,527 9,798 2,675 227 7 71,233
Total 9,28,260 2,47,792 1,38,956 58,750 9,728 13,83,485
Sources: Table 15.2(a), Agricultural Statistics at a Glance 2015, Ministry of Agriculture; PRS.
55