The crops of wrath

Demonetisation may not have hit agriculture production but it is the cause for the current unrest

Written by Harish Damodaran | Updated: June 12, 2017 5:53 am
Demonetisation, rabi plantings, Demonetisation rabi crops, india news, indian express, indian express news Demonetisation may not have hit agriculture production but it is the cause for the current unrest

When demonetisation happened, many, including this writer, thought the decision, taken at the start of rabi plantings in November, would significantly impact farm production. We were proved wrong. Good monsoon rains, after successive drought years, besides the timely onset of winter conducive to germination, turned out to be strong motivations for farmers to sow, even if this entailed begging or borrowing. They successfully weathered the DeMo storm by simply replacing cash with deferred payments, for labour, purchase of seed, fertiliser and pesticides. Informal credit networks and “social capital” ensured that, at the end of the day, we had a bumper crop.

Where demonetisation did have an impact, however, was in the prices received during harvest: Potatoes in Farrukhabad, Uttar Pradesh, fetched below Rs 350 per quintal this February, compared to Rs 600 or more last year. Moreover, while prices in 2016 had crossed Rs 1,100/quintal by mid-May, they are stuck even now at Rs 350-400. The same goes for rabi onions in Lasalgaon, Maharashtra, that traded at an average of Rs 450 per quintal in May, as against Rs 750-800 and Rs 1,200 in the same month of the preceding two years. Farmers, likewise, sold tomatoes at Kolar, Karnataka, in early May for Rs 300-400 per quintal, down from Rs 1,500-1,600 a year ago.

When was the last time we saw all three — potatoes, onions and tomatoes — wholesaling at less than Rs 5/kg, and even retail prices within Rs 20/kg? And this, in peak summer! The above “fire sales” — the evocative term used by the Reserve Bank of India (RBI) in its latest bimonthly monetary policy review statement — has been repeated across a range of other crops too: Garlic and methi (fenugreek) seed prices at Mandsaur — the district in Madhya Pradesh’s Malwa region that’s become synonymous with the ongoing farmer unrest — averaged Rs 3,400 and Rs 3,100-3,200 per quintal in April, whereas these ruled at over Rs 4,100 and Rs 4,700-4,800 respectively during the same time last year. Farmers in Nashik, which has also witnessed large-scale street action, along with the rest of Western Maharashtra, had to dump Sonaka grapes at about Rs 12 per kg in March, having sold the same green seedless variety for Rs 45 or so last year.

Even more illustrative is the story of soyabean, a kharif crop that, at harvest time in November, quoted at Rs 2,800-2,900 in Indore — that price has barely moved since then, even as sowing for the new season has commenced. A similar fate has befallen arhar/tur (pigeon-pea), which realised Rs 4,300-4,500 in January-February at Gulbarga, Karnataka.

That rate, already below the government’s minimum support price of Rs 5,050, has fallen further to Rs 3,700-3,800 levels now. Given a choice, will any farmer plant soyabean or arhar in this kharif season?

The idea behind throwing these numbers is to emphasise a fact that should be obvious: What’s going on isn’t an ordinary “fire sale” limited to one or two commodities. This is not an isolated sugar or egg price crash, affecting only the cane grower in Muzaffarnagar and Sangli, or the layer poultry farmer of Namakkal. It is about a generalised fall in prices across agricultural commodities. We’ve entered deflation territory in farm produce, whose proximate trigger clearly has been demonetisation.

How? Well, much of the produce trading in India is cash-based and financed through a chain of mandi intermediaries, processors, input dealers and retailers. While difficult to establish, anecdotal reports suggest that this traditional agro-commercial capital was dealt a body blow by demonetisation. The collateral damage from it has been a haemorrhaging of liquidity from the markets. With the trade, which used to previously buy and stock up whenever prices fell, no longer active — it neither has the cash, nor the confidence now — the produce markets are suddenly without an important source of liquidity. True, this speculative capital was also a source of inflation, wherein, say, a 10 per cent production shortfall led to prices zooming 200 per cent. But today, it’s the opposite: A 10 per cent output increase engenders a 200 per cent price collapse.

One does not know how long it would take for formal finance, banks, commodity trading houses or organised retail, to fill the void left by traditional agro-commercial capital whose transactions were largely in cash. Till that happens and liquidity truly returns, the ultimate sufferer is the farmer, evidence of which is visible in mandi prices and restive hinterlands.

But even assuming demonetisation’s effects to be transitory, there is another elephant in the room in the form of “inflation targeting”. The finance ministry and the RBI, in February, 2015, signed a monetary policy framework agreement, obliging the latter to achieve an annual consumer price index (CPI) inflation target of 4 per cent, subject to a plus/minus 2 per cent band. While such inflation targeting may have been adopted by some 29 other countries, the Indian case is unique because of the sheer weight of food and non-alcoholic beverages in its CPI. At 45.86 per cent, this is way above the corresponding combined share of these items in the official CPIs of the United Kingdom (10.3 per cent), Canada (16.41 per cent) or New Zealand (18.84 per cent).

Given the high weightage of agricultural products in its CPI, the success of inflation targeting in India is predicated on what happens to food prices. And since inflation at the retail and not just the wholesale level is what’s being targeted, it inherently incentivises policy actions that depress farm prices (“fire sales” may, after all, not be all that bad a thing for the five wise men and one woman constituting the RBI’s monetary policy committee). That could also explain why our policymakers today are naturally predisposed towards imposing controls on stockholding, domestic movement and export of farm goods, alongside allowing duty-free imports, at the slightest hint of a price increase — while doing nothing when produce realisations hit rock bottom.

Inflation eventually isn’t just a matter of the prices of goods and services going up or down. It is also about whose prices are rising and whose are falling — in other words, winners and losers. In the current deflationary environment, the farmers are the clear losers.

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More From Harish Damodaran
  1. B
    Jun 15, 2017 at 11:05 am
    When onion was 100 rupees you resented. Now it is 5 to 10 rupees and you are grumpy. What do you want to say?
    1. Rajendra Asthana
      Jun 13, 2017 at 9:20 am
      Mandsaur problem is not fenugreek but inability to sell illegal opium. All farmers are involved. The writer has a strange logic, when production rises, prices must remain stable or creep up. That defies demand supply curve. The real problem is distribution. Even today distribution makes Rs 10 to 15 per Kg for potato onion tomato. Distributors can't be replaced by publish sector. Only way out is processing industry which gives good price to farmer sells processed food to consumers.
      1. Sushil Ahuja
        Jun 13, 2017 at 7:10 am
        I along with hundreds of IAS aspirants from Old Bold Rajinder Nagar , have been pronouncing that #DemonEtisation will be proved to be a big scam, a big #political_ploy. In the very near future #मूखर्ख_के_भक्त depression में चले जायेंगे। जेसे बेचारा मेरा पयारा vajpai GuitarUncle 09871966707
        1. A
          Jun 13, 2017 at 4:28 pm
          By your comment, you prove beyond doubt that as an IAS aspirant, you will remain an aspirant only, throughout your life.
        2. Sushil Ahuja
          Jun 13, 2017 at 6:59 am
          बहूत ही अछूता, अच्छा अचछा article खोले गा #तडीमार का कचछा। GuitarUncle 09871966707 #Ram_never_existed #Allah_never_found We don't really need any castes or religions.Then, why big big #conspiracies withe farmer's #newlyborn children.
          1. S
            Jun 13, 2017 at 4:43 am
            All the talk about demon ization having negative impact on agtriculture looks massively political lobby_ing than facts. Why is there an unrest and negative impact on agriculture production and people in the business of agriculture due to demonitization? Was there something hanky-panky going on with cash, before demonitization? The middlemen making tax free money, may be? Or farmers bribing Food Corporation of India officials to record more weight than what they bring to the godown and get paid more? Why cannot the agriculture supply chain be transparent to the benefit of farmers? What is it that cannot be done through digital or bank payments as efficiently, if not more, that can only be done with cash?
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