When the note ban was announced a year ago, many feared that it would hit agriculture and informal sectors the hardest given the widespread use of cash for transacting in these sectors. Based on analysis of data from 2,953 mandis across India for 35 major agricultural commodities for the period 2011-2017, this column finds that there are lingering impacts of demonetisation on farmers and adverse distributional consequences overall.
One year has passed since India’s experiment with demonetisation rendered 86% of the currency invalid. Even at the
Early evidence based on field reports seemed to confirm these fears (see here, here and here, for example). A fortnight after the event, we wrote that official data too showed an implosion of trade in the regulated markets (
In a recent paper, we use data comprising 8.5 million unique observations on daily arrivals and prices from 2,953
The challenges in measuring the impacts are manifold. Simple before-after 8 November comparisons for the year 2016-17 are likely to be contaminated by seasonal trends. At the same time, a comparison of post-8 November figures for different years would not make sense, since no two years are like one other. Several confounding factors such as bumper harvests (which was the case in 2016-17), and cross-border trade policy changes such as exports ban or imports are also likely to have an impact on the value of agricultural trade domestically. To account for these we use the changes in value of trade post-8 November and pre-8 November over the crop year July-June for the years 2011-12 to 2015-16 to represent the counterfactual, that is, the change in the value of trade that ought to have been in 2016-17 in the absence of demonetisation and measure the extent to which the value of trade in 2016-17 (the year of demonetisation) departs from this number6.
Conceptually, an acute shortage of cash in marketplaces such as
There are several reasons however why one may not see the expected impacts of demonetisation in the data. Many creative ways to circumvent the ban surfaced in the weeks after demonetisation. For example, our field visits revealed that in many
Impacts on value of mandi trade, arrivals and prices
We find robust and significant negative impacts on the value of agricultural trade in the period immediately following demonetisation. The worst impacts occurred within a fortnight − demonetisation displaced agricultural trade to the extent of 15-17%. Thereafter, we observe a steady revival, which plateaus after a couple of months, virtually stalling after the 75-day mark. By the end of 90 days after demonetisation, mandis were still seeing a loss of value of trade to the extent of 7-7.2%.
In general, perishable commodities fared worse than non-perishables – the value of mandi-based trade fell by 23% in the week following demonetisation and by the end of 90 days, but was still 18% lower than the usual. Some commodities fared disastrously. For example, the value of trade declined for tomato by 36% in the week following demonetisation (compared to 13-27% for other perishables). Even by the end of 90 days, the value of tomato trade was down 29%. In contrast, the maximum decline for non-perishables was around 11% during the week following demonetisation. It recovered after that, and by the end of the 90th day, the decline was close to 1.3% per mandi per day over the three-month period. Amongst non-perishables, we see a significant impact on
Most of this decline in the value of trade for perishables is on account of the significant decline in prices rather than of arrivals. Tomato prices sank by 48% in the week immediately following demonetisation. Others such as cabbage, guava, saw a decline between 11-22%. There was
From mandi trade to welfare losses
It is not straightforward to move from these estimates of
Both these phenomena imply that the long-term impacts on farmer incomes are likely greater than implied by our estimates. Interestingly, if one were to go by the metric used by the Economic Survey – rabi sowing – as an indicator of stress on the agricultural sector, it turns out there are marked declines in sowing for the kharif7 season 2017-18 as of September 2017. These shortfalls in sowing figures, despite adequate and timely rainfall, are suggestive then, perhaps, of a lagged response to the monetary shock of demonetisation. There exists ample evidence on poverty traps that suggests that in the absence of markets for credit and insurance, shocks can push people into poverty and entrap them. While we will probably never know the true impact on farmer incomes due to demonetisation, the results from our analysis point to lingering impacts of demonetization on farmers and adverse distributional consequences overall. They also point to demonetisation as perhaps one source of farmer discontent in recent months across the country.
The authors thank, without implicating, Ajay Shah, Ashok Kotwal, Bharat Ramaswami, Jean Drèze, Milind Murugkar for discussions on the draft on which this piece is based.
- Data are for the year 2014-15 at 2011-12 constant prices (Government of India, 2016).
- Rabi crops (or Rabi harvest) are agricultural crops sown in winter and harvested in the spring in South Asia.
- “Contrary to early fears, as of 15
January,2017 aggregate sowing of the two major rabi crops − wheat and pulses (gram) − exceeded last year's planting by 7.1% and 10.7%. Favourable weather and moisture conditions presage an increase in production. To what extent these favourable factors will be attenuated will depend on whether farmers’s access to inputs, fertilizer, credit, and labour was affected by the cash shortage.” (Government of India, 2017)
- These 35 commodities represent most of the 12 commodity groups - cereals, pulses, oilseeds, fibres, sugar and beet, plantation crops, spices, fruits, vegetables, flowers, aromatic crops, and honey. The commodities are bajra (pearl millet), jowar (sorghum), maize, paddy, ragi (finger millet), rice, wheat, Bengal gram (chickpea), arhar (pigeon pea), soyabean, mustard, groundnut, cumin, coriander seed, dry chillies, turmeric, turmeric raw, arecanut, cashewnuts, copra, cotton, sugarcane, brinjal, cabbage, cauliflower, okra, onion, potato, tomato, apple, banana, guava, lemon, lime, sweet lime, orange and other citrus. Of these, apple, banana, okra, brinjal, cabbage, cauliflower, guava, lemon, lime, sweet lime, orange and tomato are categorised as perishables. All others are deemed non-perishables, although this is only in a relative sense.
- The value of
tradeis computed as the total arrivals multiplied by the minimum price for the day as reported in the database.
- We use lagged rainfall shocks (positive and negative),
dayof the week effects, month effects and control for the dates around Diwali, and use state and time interaction effects to control for both production patterns and policy trends that might be confounders. This difference-in-differences (DiD) approach is elaborated in the paper. We check if the assumptions of DiD hold, conduct robustness and falsification checks and validate our key findings using a synthetic control method.
- Kharif crops or monsoon crops are domesticated plants that are cultivated and harvested in South Asia during the rainy season, which lasts from April to October depending on the area.
- Aggarwal N and S Narayanan (2017), 'Impact of India's demonetization on domestic agricultural
markets' ,Working Paper WP-2017-023, Indira Gandhi Institute of Development Research (IGIDR), Mumbai. Governmentof India (2017), ‘Economic Survey 2016-17’, Economic Division, Department of Economic Affairs, Ministry of Finance, January 2017. Governmentof India (2016), ‘State of Indian Agriculture 2015-16’, Ministry of Agriculture & Farmers Welfare, Department of Agriculture, Cooperation & Farmers Welfare, New Delhi.