Rural India almost always gets the wrong end of the stick and so it’s not surprising that farmers and rural India bore the brunt of the pain of demonetisation of Rs 500 and Rs 1,000 notes. This was compounded by the fact that the rabi sowing season is starting, and cash is desperately needed to buy seeds, pesticides and urea. Those who harvested their kharif crops faced problems too as traders had no cash to pay for their produce and prices of commodities dipped. It was an irony that the district credit cooperative banks, their main lenders, were initially not allowed to accept the demonetised notes, fearing black money would be deposited in these banks, defeating the very purpose of demonetisation. After an uproar, they were permitted, though some reports claim this permission has now been withdrawn. This is just one more example of how enough thought was not paid when the demonetisation decision was taken, obviously by a chosen few who appear to be detached from rural issues.
Rural India, despite the mobile ATMs, payment banks and such financial inclusion instruments, is still a cash economy. So farmers had to suffer, and this could have an effect on production in the rabi season. Those farmers who have bank accounts can only withdraw a limited amount, and can pay in old notes only for seeds. But seeds are just a minuscule part of their needs, and they need cash in hand. Agricultural labourers also suffered as employers had no cash to pay salaries. As the government is working on a trial and error basis, this too may be resolved soon if the farmers protest loudly enough. What is of concern is that agricultural growth has already been slowing down and grew by just 1.2 per cent last year. With the demonetisation problem it could bring down agriculture’s share of GDP, that is already expected to see a drop of two per cent, according to some experts, as it has halted the growth momentum that was just getting evident.
What is more significant is that this would affect the purchasing power of people in rural India, that in turn will affect production in urban India, specially in small and medium industries. There will be a lack of demand, particularly for fast-moving consumer goods like healthcare products as consumers do not have cash. The government’s need to crack down on black money is part of the Prime Minister’s election promise, but this demonetisation is hardly the answer as the big black money owners don’t keep cash under their mattresses. They invest in sectors like real estate under benami names, and unless there is a way to stop black money being generated like this, this will be a battle half won.
