 "Cash crunch could take away part of monsoon gains")
India’s big rural economy, which after two years of distress was on a slow path to recovery on the back of a favourable monsoon and bumper harvest, has been hit hard by the Centre’s sudden decision to demonetise high-value currency.
The gains of a strong monsoon and bumper harvest could get significantly offset unless the situation on the ground improves dramatically in the coming weeks.
Sales of tractors, consumer durables, agriculture inputs including seeds, two–wheelers and cement have all taken a beating due to cash crunch.
The period following Diwali is usually the time when farmers start selling their kharif harvest to accumulate cash for investment in inputs during rabi season and also to purchase items of need.
“Work has come to a complete standstill in all the mandis and APMCs (Agricultural Produce Market Committees) across North India as no one has any cash. This is the peak season for paddy and initially for a few days farmers did bring in their produce, but that has now stopped as wholesalers and commission agents ran out of cash, while farmers stopped accepting Rs 500 and Rs 1,000 currencies,” said S P Gangwar, secretary of APMC Chandausi in Uttar Pradesh.
He said work in almost all the wholesale markets have come to a standstill due to this crunch. Prices of key agri commodities have softened by up to 10% in the past week.
“Cement dispatches are down 30% since last week. I get a sense that the problem is greater in cities. We remain optimistic that the situation will turn normal in the next four to five days,” said H M Bangur, managing director of Shree Cement.
Also, farmers have slowed down their pace of sowing of rabi crops, which would have an impact on sales of agriculture inputs such as seeds, fertilisers and pesticides.
“In the entire pesticide market, there is a lot of illegality and as per some estimates of the Rs 16,000-18,000 crore plant chemicals market in India, Rs 1,500-2,000 crore is without valid documents. All these would vanish, which could cause temporary pain,” said Ankur Aggarwal, managing director of Crystal Crop Protection.
Assuming that the rural sector is predominantly agriculture-based, the total size of the rural economy (gross value added) should not be less than Rs 21 lakh crore. This is a significant chunk of the country’s total economy, estimated at Rs 1,23,00,000 crore in 2015-16.
A 2015 Boston Consulting Group report said almost 24% of India’s branded fast-moving consumer goods (FMCG) market lies in the rural sector, something which usually depends on cash transactions at least in the last mile.
“There has been an impact across the country due to liquidity crunch. Growth in the FMCG space was subdued early this year. We were expecting the rural demand to pick up in the second half of the year thanks to a better monsoon. But now, there is an impact due to monetisation. We, however, expect the situation to turn near-normal by the end of the month. It is difficult to quantify the impact at this point as the situation is highly volatile,” Harsha V Agarwal, director at FMCG major Emami, told Business Standard.
Not only FMCG companies, two-wheeler and automakers that get a sizeable volume of their sales from rural markets, particularly during the wedding season, and were expecting a turnaround following good rains after a break of two years, have also seen their sales falling due to cash crunch.
Nikunj Sanghi, managing director of Alwar-based J S Fourwheel Motors, which operates dealerships of Mahindra & Mahindra and Hero MotoCorp, says this is a season of weddings and could have been a fantastic period for two-wheeler sales.
“I would normally sell about 1,000 two-wheelers a month through my main dealership in Alwar and the seven sub-dealerships in the villages. In the past five days, only 20-22 units have been sold. People are not coming for servicing either since one service costs about Rs 2,000. So, the business has practically come to a standstill. It is almost like a shock. Buyers in our areas have traditionally used cash to pay. Now, the banking habits of rural population will have to change,” Sanghi added.
However, many feel that although the rural sector has been impacted due to demonetisation, the pain is temporary.
“There are some problems in payment to smaller milk farmers who do not have bank accounts. But cooperative societies, which make payment to farmers on our behalf, are trying to reduce delays,” said R S Sodhi, managing director at dairy major Amul, which procures milk from 3.5 million farmers and pays Rs 450 crore to farmers every week. He, however, said there was no drop in procurement and demand for milk.
Noted agriculture economist Ashok Gulati, too, was supportive of the government’s idea. He said just like in urban areas, India’s rural sector, too, is facing some hardship due to sudden demonetisation of currency, but the bold move would clean up transactions. In the days to come, the actual situation on the ground should improve. Else, India’s rural sector might face another bad year.
