How to sow a reform

Some ways to relieve the pain of demonetisation in rural India.

Written by Ashok Gulati , Siraj Hussain | Published:December 1, 2016 12:01 am
demonetisation, demonetisation effects, demonetization india, demonetisation news, india news, demonetisation protests, protests demonetisation Farmers protest against demonetisation. Express File Photo)

Demonetisation has evoked sharp and extreme reactions from various quarters. At one end, we have nation-wide surveys of C-Voter and the PM’s App, showing 88-90 per cent people supporting it, and at the other, we have strong protests in and outside Parliament by several Opposition parties. Manmohan Singh, former prime minister, went even to the extent of dubbing it as a case of “monumental mismanagement” and “organised loot and plunder”, which may cost the economy 2 percentage points of GDP growth.

One may differ from both extremes, but almost all agree that in the immediate run, the unorganised sector has been hit hard as it runs largely on cash. And within the unorganised sector, farmers are suffering as they do not have enough cash to purchase the required inputs for the sowing of rabi crops.

The rabi area, as on November 25, was about 7 per cent lower than the average of the last five years, and fertiliser consumption during November 1-28 is about 12 per cent lower than the average of the last three years. Comparison with last year is not appropriate as it was a severe drought year. Although sowing is still on and it may soon catch up to “normal levels”, it is true that the cash crunch is causing quite a bit of inconvenience and hardship to farmers. The government needs to act on a war footing to increase liquidity and promote e-payments in rural areas.

How best can it be done? It may help to know that of the total outstanding agri-credit in September 2016, almost 76 per cent came from commercial banks, and the remaining from cooperative banks and regional rural banks almost in equal proportion. Further, there are, cumulatively, almost 13 crore Kisan Credit Cards (KCC) issued by various banking agencies, of which about 7.5 crore are active.

What this implies is that there is a good chance to upgrade much of the agri-credit to the electronic platform quickly. But given that the density of bank branches and even ATMs in rural areas is less than one-fourth of that in urban areas, opening new bank branches or fixing new ATMs in rural areas will not only take time, but is also not economically viable for banks. However, providing custom-made POS machines (point of sale) with business correspondent/agri-entrepreneur model is much cheaper (less than one-tenth the cost of ATM) and can be quickly ramped up in rural areas. These machines can sync farmers’ accounts with their Aadhaar numbers and also use credit/debit cards to conduct financial transactions, including cash withdrawal. Further, POS machines can help create new jobs and augment incomes in rural areas. With this win-win situation waiting, what is needed is a massive and quick infusion of these POS machines in rural areas. The government should invite all corporate bodies, especially those with a stake in agriculture and rural finance, to use their corporate social responsibility (CSR) funds to supply POS machines and train their owners under CSR activity. This would convert the current crisis into an opportunity of narrowing the rural-urban digital divide.

Further, in all APMC-regulated agri-mandis, the government should make it mandatory that transactions above a certain amount, say Rs 20,000, will take place only through electronic transfers. Payment for MSP of wheat and paddy in MP, Chhattisgarh, Odisha and UP etc is already being made to farmers’ bank accounts. But Punjab and Haryana, who route these payments through arhatiyas, also need to pay directly to farmers’ accounts.

NABARD, in association with cooperatives and RRBs, needs to take the lead in organising nation-wide training/demonstration camps for farmers to familiarise them with digital banking. Using POS machines and converting all KCCs into chip-based plastic cards needs high priority. Wherever connectivity is a problem due to poor power supply, NABARD has been supporting solar-based VSAT through its financial inclusion fund. We believe all this can be ramped up in a short period and change the very culture of transacting business in rural areas.

This move towards digital banking can be sweetened for the rural masses by bringing food and fertiliser subsidies under the direct benefit transfer regime, especially in regions having high literacy and bank density like Goa, Kerala, Chandigarh etc.

Questions are being raised over whether demonetisation will help contain the generation of black money. It is obvious that this measure, howsoever bold it may be, is impacting only a part of the cumulative stock of wealth stashed in cash. Bigger chunks of black income may be hidden in real estate, jewelry, and even outside the country. Prime Minister Narendra Modi has already warned that demonetisation is only the beginning to contain black money, and more is likely to follow to attack other components of unaccounted wealth.

However, to attack the generation of black income, several other measures would be needed, particularly the rationalisation of taxes, from stamp duties to agricultural income tax. Currently, agricultural incomes are exempt from income tax, and that has become an easy route for many non-farming actors to hide their income under the guise of agricultural income. This is a big loophole that needs to be quickly plugged by bringing agricultural income under taxation with an exemption limit of, say, Rs 7.5 lakh, amounting to three times that for non-farming incomes, to start with. This would exempt almost 98 per cent of the farmers, even in an agriculturally prosperous state like Punjab. But it will help catch those who are hiding their black income from non-farming operations and showing as agricultural income. Last but not least, making political funding through electronic transfers will bring more transparency and credibility to government.

All these measures, if taken quickly and cohesively, have the potential not only to relieve rural India of the pain of the current cash crunch but also put it permanently on a digital platform, which will be a major long-term gain. Is the government ready to bite the bullet? Only time will tell.

Gulati is Infosys chair professor for agriculture at ICRIER, and Hussain is former secretary of agriculture and farmers’ welfare (GoI) and currently visiting senior fellow at ICRIER.

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  1. A
    Dec 1, 2016 at 10:09 am
    Where is cash? Ppl even in urban centres are unable to find cash either in Banks or in ATMs, so when will govt. attend to rural need is anybody's guess
    1. R
      Dec 1, 2016 at 3:49 am
      Simply impose expenditure tax on our spending and remove all taxes can help tremendously
      1. K
        K SHESHU
        Dec 1, 2016 at 1:11 pm
        Removing cash from economy us removing blood from human body says Arun Kumar in an interview publushed in kracktivist site
        1. A
          Ajay G
          Dec 1, 2016 at 4:20 am
          Well articulated view.
          1. A
            Aleen Mukherjee
            Dec 1, 2016 at 7:07 am
            lt;br/gt;Good concept to use and impliment at war footing in India. Though there are already few..may be incentive should be provided to gain more momentum...
            1. M
              meraz ali
              Dec 2, 2016 at 2:26 pm
              in india only 35 % access to net ,how can possible india transfer into cash less economy .95 % debit card holder use to wthdraw mony from ATM.
              1. A
                Anil Maheshwari
                Dec 1, 2016 at 4:00 am
                Brilliant and superb article rooted in ground realities. It is beyond comprehension that why the government failed gly and gravely to rope in the network of post offices, numbering more than 1.8 lakh in the country to make the rural sectors digitalise.
                1. S
                  Dec 1, 2016 at 8:25 am
                  A WELCOME suggestion.The criticism launched by the Online readers on the present IE Editor has an effect,that the Express has brought in a person of repute who has offered a;br/gt;On the subject i,I would like to add,use the Post offices as a Bank to mitigate the hardship of rural India and let the PMO itself monitor the operations;br/gt;Let the concrete steps be taken to abolish personal income tax upto Rs 6 Lakhs and there be a flat tax rate of 10% to Max:20% on income exceeding Rs 6Lakhs, lt;br/gt;It is a well known fact that all unaccounted money is in the Real Estate and funds stashed abroad.let PM Mody launch a decisive strike on this evil sector
                  1. I
                    Dec 1, 2016 at 1:44 am
                    Is the taxing of agricultural income unconsutional? However, it can always be made more acceptable. But to start with it may be made based on land holding in different categories.
                    1. J
                      Dec 1, 2016 at 11:18 am
                      My village has around 1000 houses, no post office. PO and banks are about five kilometers!
                      1. K
                        Dec 1, 2016 at 5:02 am
                        Kudos must go to Modi for his determination and action,I wish could have said aboutlt;br/gt;Manmohan Singhji,I am sure that he chose to do nothing about the issues of counterfeitlt;br/gt;Indian currency produced in stan supplied to the terrorists to finance their operations in India,furthermore it was easier to keep large bills at home and not pay taxes as it was cash;br/gt;Another issue will haunt Manhohanji and Congress, is the drugs that were being brought into state oflt;br/gt;Punjab across the border by the stanis
                        1. M
                          Mahender Goriganti
                          Nov 30, 2016 at 11:58 pm
                          Good review and analysis and suggestions.
                          1. N
                            Nov 30, 2016 at 9:21 pm
                            I don't see anything wrong with black money. Basically govt try to collect taxes from people. Bigger the taxes, less economic growth. I would rather have money in people's pocket than government's. Govt in general in any country, are largely inefficient in their programs. They waste lot of money by doing corruption and by many other means. It should be lower taxes for all and more take home pay for everyone. Growth should be bottom up. Govt cant be running mive programs. Instead promote small businesses and encourage investments. Modi is wasting time and energy. He is trying to do too many things in short amount of time., He could have focused on more important stuff.
                            1. P
                              pundai periyar
                              Dec 1, 2016 at 6:55 am
                              Maun Mohan, Amartaya, Digvijay , Rahul , Sonia are all thieves who looted India
                              1. S
                                Sameer Pawar
                                Dec 1, 2016 at 6:14 am
                                Providing internet access to rural India is one of the biggest preconditions that should be fulfilled in order to turn India into a cashless or digital economy.
                                1. S
                                  Dec 1, 2016 at 4:38 pm
                                  If farming is not profitable why people are holding on to their land? Go to Orissa and ask the people who are sitting on govt land and refused to vacate when govt wanted to hand over the land to POSCO? Obviiusly farming is profitable in those items where there is no government interference. Problem in our country arises out of the fact that in most it is rain fed and fragmented tenancy. When both these drawbacks are removed you see the kind of prospsrity that is seen in Punjab where farners were bed shies which cost ₹10000 a pair. Getting sentimental to hide the actual fault and exploiting to evade tax by rich farners is a kind of financial hooliganism which ni government has ever dared to question.
                                  1. S
                                    Dec 1, 2016 at 4:15 pm
                                    No pain no gain. Those who want 15 lakh in their account without doing any thing must take the blame fir instigating the govt
                                    1. S
                                      Sudheer Thaakur
                                      Nov 30, 2016 at 7:37 pm
                                      1. T
                                        Dec 1, 2016 at 3:52 pm
                                        In a country like ours, cash transactions should continue till the majority of the people learn how to use the electronic systems. Also, what is more important is security a country like ours, where looting occurs in day light cyber security is important . Otherwise, digtalisation will go for six.
                                        1. V
                                          V. Ramaswami
                                          Nov 30, 2016 at 8:42 pm
                                          What we need are more columns of this type with concrete ideas towards solutions instead of just complaints and whining only.
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