A year of demonetisation: How this unprecedented move hurt farmers and took away jobs

The farmers' story

Demonetisation was announced just when the farmers in India were sowing their Rabi crops. Agriculture sector contributes only 15% to India's GDP but supports 70% of Indian population. What made the community of farmers more vulnerable to the effects of demonetisation was the fact that 90% of the transactions in the sector are done in cash.

According to a Niti Ayog report wheat, which accounts for 47% of total area under rabi crops, showed a shortfall of 41% in the area at the time of demonetisation. The gap declined to less than 1% by mid-December 2016 and crossed normal levels by 2.12% by the end of December.

However, demonetisation claimed its victims in the form of those dealing in perishables. The price of vegetables and pulses crashed in the three-month period post demonetisation, in the range of 2% to 61% depending upon the cash crunch in different agricultural markets.

There is no surprise that five state governments – Maharashtra, Uttar Pradesh, Punjab, Karnataka and Rajasthan – had to announce a farm loan waiver post-demonetisation, something that the Reserve Bank of India (RBI) got worried about.

Has the farm economy recovered after a year of demonetisation?

The agricultural sector grew by 2.3% during April-June 2017. This was the lowest growth recorded by the sector in the past five quarters.

An analysis done by Centre for Monitoring Indian Economy (CMIE) shows –

“Prices of rabi pulses masoor and peas reported a steep year on year fall of 21.1% and 9.2%, respectively, in the June 2017 quarter. Vegetable prices too had a free fall. Potatoes ruled 44.2% lower than a year-ago, while tomatoes declined by 31.2%. Other vegetables such as onions, peas, cabbage, radish, cucumber too suffered fall in prices in the range of 10-20%.”

While lower food prices are good for the government and the middle class, a crash in price to the extent reported above can lead to distress among farmers who sell their output in the market.

The same report by CMIE makes a bad prognosis for the agriculture sector in the quarter ended September 2017 –

“It follows then that the agricultural sector is likely to post a worse performance in the quarter that will end in September 2017 compared to what it did in the June 2017 quarter or in the September 2016 quarter. It would also be lower than our forecast of 2%.”

Jayati Ghosh, professor of Economics at Jawaharlal Nehru University says -

“Demonetisation has dealt a deadly blow to the agriculture sector. The small and marginal farmers are yet to recover from its effect and it is also visible in the demand from the rural areas. The government may be talking about doubling farm incomes by 2022, but it is unlikely to happen in the current scenario.”

Job destruction

About 1.5 million (15 lakh) jobs were lost in the January-April 2017 period due to demonetisation.

According to CMIE – “The estimated total employment during the period was 40.5 crore compared to 40.6 crore during the preceding four months, September-December 2017.”

India needs to generate more than a million jobs per month to keep its young population engaged in economic activity to reap the benefits of the demographic dividend. However, demonetisation has lead to the destruction of jobs that supported the poor and the lower-class population in the country.

It is to be noted that jobs at the upper end of the economic activity (IT, banking, automobile) are getting replaced by artificial intelligence, creating a deadly combination for an emerging economy like India. India will become the youngest nation in the world by 2020 with 64% of its population in the working age having an average age of 29 years.

The supplement of GST and its side effect on SMEs

The SME sector accounts for 95% of industrial units in the country and contributes 40% value addition in the manufacturing sector. The same segment of the economy was at the receiving end of the demonetisation move as small traders rely only on cash transactions to conduct their business dealings.

While the cash shortage improved by the end of March 2017, the government introduced an ill-planned goods and services tax from July 2017.

This led to utter confusion among small traders. Majority of them found it difficult to file their compulsory income tax returns (three per month) and there was no clarity on the rate of tax on hundreds of items.

The situation was aggravated by a steep decline in demand in the economy that led to 70% decline in the sales of small retailers in the month of October that coincided with India's biggest festival Diwali.

In the past one year, Modi government has changed its stance as well as goal posts pertaining to demonetisation a number of times. From calling it a move that will kill terrorism in the country to choking the funding of stone-pelters in Kashmir, PM Modi has given preternatural reasons to justify a decision that has proved to be a disaster in all the economies where it was tried (Russia, Zimbabwe, and Nigeria).

It is anybody's guess when the economy will recover from its current shambles.

Edited by Jhinuk Sen