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.