Rural India's bad luck does not seem to end. After two consecutive years of drought, the prospects for the rural economy were finally looking up with a good monsoon in 2016. With expectations of a record kharif production, rural consumption was expected to rejuvenate overall economic growth. But, Prime Minister Narendra Modi’s decision on November 8 to effect a demonetisation of high denomination currency notes, to negate black money held in cash, seems to have severely disrupted the rural economy. The real trouble is that the rural economy has an overwhelming dependence on cash transactions, unlike the urban middle class, which has other options such as online and mobile banking and plastic money. This obvious weakness has been made worse by the fact that over 90 per cent of rural areas are unbanked and as such the government’s ability to reach out with new currency is further hampered. This becomes painfully clear by one data point: In the 10 days since the decision to demonetise, the government has been able to replace only 10 per cent of the cash made worthless — and these are all-India figures.
Unsurprisingly, this has led to a liquidity crunch that has deflated the rural economy. Analysts suggest that rural wages have declined in real terms since November 2013 and it is noteworthy that the intervening years have been drought years. Overall, rural incomes have hit an all-time low. Much of this has also got to do with the timing of the demonetisation move: It was smack in the middle of hectic agrarian activity, with farmers either busy wrapping up kharif harvests or sowing the rabi crop. Many farmers find no takers for their produce as buyers do not have money and prices have collapsed. Those lucky enough to have sold their harvest earlier are suddenly rendered without cash because they do not have the right currency notes. Such farmers do not have the means to buy the necessary inputs to initiate the new crop cycle.
To be sure, with numerous rural distress stories filtering through, the government has taken some decisions after dithering a lot. For instance, the government has raised the withdrawal limit for farmers to Rs 25,000. It has also allowed them a 15-day grace period to pay crop insurance premiums. And on Monday, after initially rejecting it, the finance ministry acceded to the ministry of agriculture’s demand for allowing farmers to use old currency notes to buy seeds. But, measures such as the relaxation on seed purchases are too little too late. For one, only 30 per cent of the seeds are replaced, year on year. Secondly, the ideal time for rabi sowing of wheat is until November 15-20. Late sowing crop yields tend to suffer, especially if temperatures rise in March, as they have done over the past few years. Moreover, the relaxation does not extend to other key inputs such as fertilisers and pesticides, the absence of which may reduce the yields by half. The agriculture sector contracted by 0.2 per cent in 2014-15 and grew by just 1.2 per cent in 2015-16. Even on this low base, revised estimates suggest growth of less than one per cent in the current financial year. Clearly, more needs to be done to address the unfolding rural distress.
