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Why Bankers Won’t Go Anywhere Near Small Farmers



A miller, a trader and a farmer walk into a bank. Each carries the receipt for a bag of wheat worth ₹20. The miller walks out with a loan of ₹16, the trader with ₹14, and the farmer with ₹12. What happened? The banker did not want to be painted as the villain if the farmer’s loan went belly up. Can we blame him?

As of March 2016, only 6% of agricultural loans went bad while companies defaulted on 23% of their loans, show RBI figures. Yet, to the banker, the further any commodity moves from the farmer, the “safer” it becomes. He can auction the commodity, attach property, restructure the loan, or go to court if the processor or trader defaults. If any dispute over loan repayment arises with the farmer, the banker has already lost.

The absence of an effective dispute resolution mechanism between farmers and banks makes banks avoid exposure to small-holder agriculture. So the farmer has also lost. If we can solve this vexed problem, farmers will get bank finance more easily. The farm distress and the suicides will abate.

The share of agricultural credit in total portfolio has stagnated at about 13% in the last decade. While the RBI and government are taking prompt corrective action to resolve corporate loan disputes, there is little thinking around easier agricultural debt recovery. It is a political hot potato, despite the slogan of inclusive growth.

The delay impacts 56 million rural lives daily. Indian farmers need capital to produce and market crops worth more than ₹15 lakh crore annually. The total farm credit target this year is only ₹10 lakh crore. The deficit is further widened by such systemic hurdles.

Loan waivers and interest subvention schemes are never the answer. Farm loan waivers will leave farmers in Maharashtra, UP, Karnataka, Rajasthan, Madhya Pradesh, and Punjab worse off. Banks will be even more cautious henceforth, triggering the next vicious cycle. Without institutional capital, Prime Minister Narendra Modi’s dream of doubling farm incomes is impossible. Farmers remain at the money lender’s mercy.

There is undoubtedly progress in solving the other challenges to rural lending: agricultural and commodity risks, high transaction costs, volatile incomes, and families without formal credit history. Thanks to information and communication technology, farmers’ collectives, modern warehousing, and financial services, building blocks are available for channeling greater capital flows to agriculture, especially tenant farmers and women farmers.

Learning from microfinance that uses the strength of social relationships, banks are willing to give post-harvest loans on the strength of commodity supply chain relationships such as negotiable warehouse receipts. The system is turning tamper-proof with the arrival of two commodity repositories in July, under the Warehousing Development and Regulatory Authority, that will maintain an online record of all negotiable warehouse receipts issued by accredited warehouses and the commodity balances in an account.

Credit reporting bureaus covering microfinance institutions are helping women farmers capitalise on the reputations they establish as microfinance borrowers to access post-harvest loans.

Yet, no banker will come forth. Other commercial relationships are similarly hobbled. Contract farming had no effective way for dispute resolution between farmer and company, affecting business. The new National Agricultural Market won’t succeed without one.

Resolution of contractual disputes and enforcement of the sanctity of commercial contracts is thus the most important agricultural reform. Farmers will be the first to see its value.

As approaching courts is unfeasible, quick and easy ways are needed. Several countries have evolved a dispute mediation law for loans above a certain size, and time-bound low-cost out-of-court procedures. Farmers are provided governmental legal and financial assistance. Such mechanisms avoid the “all or nothing” outcomes typical of trial judgments, encourage communication, and reduce risk for both parties. Most importantly, they reduce political confrontation. Once they are back in the formal credit system, the farmer suicides will stop.

Farm families in financial difficulty face emotional distress, hunger, health problems, family violence, and social stress. They will build better lives if we remove the hurdles that make agriculture a business pariah. In our zeal to protect the “small guy”, we have condemned him to stay small.

The corporate bankruptcy code was introduced to restore banker confidence and ease the flow of credit to healthy companies. Agriculture too needs effective dispute resolution mechanisms as a first step to health. Everybody seems to care about the family farm, not the family bank. It is in every farmer’s interest to correct the perception.


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Farmers’ distress: Just ease their doing business

Farmers in distress

Mandi blues

Farming, India’s largest private sector, lacks the freedom successful businesses enjoy: surviving the bad years on the back of earnings in the good years. Through frequent trade barriers, distortion of price signals and controls in the name of the consumer, farmers have never been allowed to maximise earnings even in the good years. The current agitation reveals its human cost.

Government wants prosperous agriculture, but gains favour with voters when it lowers the price of food. Policies are ‘pro-farmer’, until the crops are sowed. Then they turn ‘pro-consumer’ by depressing agricultural prices. This forces farmers to pay an invisible, off-balance-sheet food subsidy. Eventually, the bad effects of price controls are fixed with farm subsidies and loan waivers.

Despite the high price of food, real income growth of farmers has actually declined in the last five years because earnings were below rural inflation. Cereals, oilseeds and pulses that provide a livelihood to most small and marginal farmers, were the least profitable compared to fruit and vegetables, spices, cotton and sugarcane.

The debilitated earnings and adverse terms of trade forced families to borrow from the village moneylender for day-to-day needs. There was no buffer for the seasons when crop prices are low or plantings fail. Farmers deserve better. Unlike other sectors, they face almost perfect competition. There are lots of sellers for each commodity and no single farmer is able to influence the price. The majority never reach regulated markets or formal value chains to receive the full value of their produce.

Farmers rarely receive more than 50% of the consumer’s rupee. Several studies have conclusively shown that processing accounts for more than half of the total cost build-up from farm to fork. Transportation (21%), bag and packing (12%), labour (7%), mandi fee and development cess (6%) contribute the rest. This explains why we continue paying.`150 a kg for tur dal at the kirana while the farmer sells in distress.

Farmers are hit even by retail price controls because the marketing costs (marketing, processing, wholesaling, distribution and retailing) are typically sticky.

Let’s say the retail price of tur is Rs 100, of which the marketing cost is Rs 50, and the farmer gets the remaining Rs 50. When retail price drops to Rs 90, the marketing cost remains Rs 50, leaving the farmer with only Rs 40. A10% fall in retail prices hits him by 20%, according to a study by the National Institute of Agricultural Marketing.

Not surprisingly, manpower and investor capital are fleeing agriculture for better returns elsewhere.

What is the solution? Food subsidy should be direct so that it doesn’t distort the market or create incentives for wastage. Competition and markets are even better tools against inflationary farm-to-consumer price spreads because they offer a win-win for consumers and farmers.

States must increase competition among traders through the National Agricultural Market and stop protecting inefficient processors. Farmers, too, will receive a higher share of the consumer rupee once marketing costs drop. In 2015, access to the Unified Market Platform in Karnataka brought farmers 13% higher prices and 9% more income, finds the Niti Aayog. Demand and supply need better coordination to avoid price spikes.

However,government must resist the temptation. The case against price control is not that the market always gets it right. But many buyers and many sellers do a better job than any central planner in figuring the hidden costs and indirect consequences.

In the long run, consumers and farmers would be better served if GoI focuses on stabilising the macro issues of market access, taxation, property rights and regulation so that the supporting institutions necessary for an efficient farm sector mature quickly. Trying to stabilise micro-level prices of each commodity leaves farm prey to economic depression.

Farmers have postponed consumption, explored the market place, invested capital, grown crops worth Rs 15 lakh crore, built a business, created 215 million jobs and accumulated stocks — long before earning a single rupee and assurance of any success, all in response to what they imagine consumers want. When prices are beaten down — through government action or buyer collusion — anger is inevitable. It is easy to blame the government for the agrarian unrest.

When we complain of the operation of the market as consumers, we are as much to blame.

Because farmers have no savings and, thus, no security, agriculture has become a fragile system that breaks under the slightest downside. Farmers need just returns to fulfil their role in producing food. India’s nutritional security depends on their entrepreneurial energy.

DISCLAIMER : Views expressed above are the author’s own.

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Farmers need freedom


Cumulative rainfall during the post-monsoon season up to December 21, 2016, was 43% below the longterm average, the highest deficiency in recent years.

Farmers are clamouring for attention. From loan waivers and suicides, to carrying human skulls, slashing wrists and protests before the PMO, they are using every trick to bring the spotlight on their angst.

Unless we solve the root cause — market failure, and crop failure due to climate change — all succour will remain cosmetic and short-lived. So, what are the policy instruments that will allow the most efficient farmers to cover their costs of production?

The honest search for answers must begin by acknowledging that, unlike manufacturing and services, agricultural markets don’t auto-correct the balance between demand and supply.

While high prices result in higher acreage, low prices don’t correct supply in the short term. As no farm gets mothballed, overall production capacity remains the same. In such periods, we need to generate demand and ensure that farmers have sufficient capital to keep their heads above water.

Right now, both are missing.

The numbers tell the story. Retail food prices rose 1.93% in March, slower than a2.01% annual increase in February. Vegetable prices have fallen for the seventh straight month.

Year-on-year wholesale food inflation measured by the wholesale price index plummeted to 1.54% in November 2016, the lowest since September 2015, due to cheaper rice, pulses, fruit and vegetables (particularly onion), oilseeds and vegetable oils.

Though pulses are India’s primary source of protein, the pent-up demand was too inelastic to mop up supply last summer, giving farmers an income shock. Ditto after the fire sales in onion and potato.

A bumper chickpeas harvest is expected to flood the market shortly In storable crops, such as potato, oilseeds, spices and grains, the overhang of excess supply gets further prolonged. Simultaneously, farmers are grapplingwith crop failure that further affects income.

Although most winter crops, particularly wheat, are largely irrigated, northeast monsoon and winter rains are crucial for rice, maize and pulses in the south. Overall, rainfall patterns have become more irregular over the last decade.

Extreme rainfall events in central India, the core of the monsoon system, are increasing. Small and marginal farmers need to invest in climate-smart growing practices for sustainable agriculture, and buy insurance.

Few have capital or the incentive to invest. The average farm household in Uttar Pradesh earns Rs 4,923 a month and spends Rs 6,230, according to the National Sample Survey Office Situational Assessment Survey, 2013.

Money lenders, not banks, finance it. Bihar and West Bengal families are equally in dire straits. To worsen matters, rural income from infrastructure projects, factories and construction is stagnant.

Eventually, the low prices and lack of savings will reduce the number of commercial farmers as banks curtail lending in the name of credit discipline.

In short, everyday low prices, though great for consumers, are sinking India’s nine crore farming-dependent families further into poverty, malnutrition and illiteracy. We have deliberately ignored this tragedy. Instead, we focus on keeping food inflation low, an indicator keenly watchedby consumers, media and investors.

Even now, stock limits remain on pulses. India’s farm price and income problem is not unique. Other nations use direct payments, revenue insurance, buffer stocking and loan deficiency payments to tide over.

The US diverted excess corn into fuel ethanol. We can start by recognising that, all along, we have coerced the farmer to accept lower profits in the ‘national interest’ when supply is low, and abandoned him when prices are low.

That leaves him with no capital and savings to cope. Companies use profits from the good times to survive times of oversupply. Farming needs the same business freedom.

Consumers can be protected by more targeted actions. Reducing the overall cultivation and marketing costs through better market access will cut losses.

An enhanced push to exports, seed supply and solarpowered drip irrigation, livestock farming and dynamic buffer stocking, will further bulwark incomes. Private sector will do the heavy-lifting. Farmers are belligerent for a reason.

They have been forced to subsidise consumers for too long. Agrarian distress is the direct outcome. It is true that not every cropping season will be profitable.

But it need not end in tears. Agriculture needs a new intellectual paradigm that empowers farmers to cope with the inevitable long periods of demand supply mismatch by freeing them to maximise profits in the good years. Farmers don’t need subsidies, they need capital. For that, price is the best fertiliser.

The writer is chief marketing officer, National Commodities and Derivatives Exchange (NCDEX)

DISCLAIMER : Views expressed above are the author’s own.

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Govt should build on the Budget roadmap

In its Fiscal Policy Strategy Statement, the government has stated that its prime responsibility is “providing a safe and stable environment for the private sector to create wealth”. Agriculture is India’s largest private sector enterprise. But while it recognized the problems, the Budget stopped short of making agriculture an attractive investment for either private companies or farming households.

Even for consumers, there is something fundamentally flawed when the food subsidy bill is 2.5 times the total spend on agriculture and allied sectors. Had the Budget pushed for modern ways to deliver social services, it could have improved its balance sheet in one stroke.

Farming is an input intensive business that requires timely and cost-effective availability of land, seed, fertilizer, irrigation, machinery, credit and labour. If any of these inputs is missing or mispriced, the crop becomes uncompetitive in the market. The current fertilizer subsidy system, besides costing the exchequer Rs 70,000 crore annually, has created a black market where small farmers pay 60% more than the MRP, which incentivizes production inefficiency, and leads to over-use, depleting soil quality and damaging human health. Though urea consumption has risen over the last 15 years, no new factory has come, leading to rising imports. Neem-coating urea prevents leakage into the chemical industry but doesn’t solve the festering sectoral crisis. Similarly, price controls have disenchanted the private seed companies. This has left the field open for counterfeits and black markets.

Foreign companies are free to set up wholly-owned companies in the horticulture, animal husbandry, seeds, plantations, and agricultural services sectors. Yet, between 2000 and 2015, barely $1800 million FDI was received. Start-ups are keen to introduce specialized technologies and communication platforms. The Budget should have offered incentive, or at least assurance, to potential Indian and foreign investors that it would be easy to do business in agriculture.

To move beyond a subsistence existence, farmers largely invest savings in their land. Two consecutive droughts and bad harvests have put paid to that. Banks are not forthcoming with long-term credit. Of the Rs 9 lakh crore credit offered last year, the bulk were short-term seasonal loans. The trend needs to change even though the allocation has increased to Rs 10 lakh crore.

India has close to 2000 Farmer Producer Companies for aggregating harvests and increasing the bargaining power of members. The Budget could have offered incentives for FPCs that invest in improving productivity and connecting to markets. In short, more measures were needed to stimulate private investment in agriculture to produce wealth.

At the same time, government’s own spending, at Rs 56,992 crore, needs to accelerate and become more imaginative. Take irrigation. With half of the arable land under rain-fed agriculture, India practices energy-intensive “DG set-dependent” farming. The number of agriculture connections has increased from 13 million to around 19 million between 2001 and 2015. Over 18% of total electricity consumption and over 5% of total diesel consumption is used for irrigation. By incentivizing a shift to solar-powered micro irrigation, the Budget could have launched a virtuous cycle with far-reaching impact on food, energy, climate change, and water cycles. Maharashtra has already launched the world’s largest solar pump irrigation project.

The Rs 9,000 crore outlay on insurance will cover only 40% of the arable land. In any case, insurance premium is not a substitute for capital formation.

Connecting farmers to market is the right way to ensure that producers get a fair share of the consumer’s rupee. But the Budget stays on the beaten path with solutions such as a new model Contract Farming law and denotifying perishables from the APMC Act. There is no dearth of contract farming laws. They failed because they are tough to enforce. Similarly, if exiting APMC market yards was the solution, fruit farmers in Bihar would have been prosperous by now because the state has repealed the APMC Act. Instead, they are struggling to survive. Given the right market infrastructure, there would be no need for the government to connect farmers to food processing units. It would happen automatically.

The government is banking on the National Agricultural Market (e-NAM) as the platform for bringing together buyers and sellers beyond geographical limitations. Though e-NAM has officially connected 250 mandis, the basic legal frameworks, quality standards, payment clearing systems, and storage infrastructure that define a market are missing. Without these building blocks, e-NAM can’t be the bridge between spot and futures markets.

Exports have traditionally benefitted farmers. Since it has acknowledged the tough external environment, the government should helped promote commodity exports that have fallen 20%.

In contrast to agricultural spending, the food subsidy bill has ballooned to Rs 1,45,339 crore, or almost 1% of the GDP. Food subsidy is paid to the Food Corporation of India for maintaining the buffer stocks of wheat and rice and delivering to ration shops in selected states. The ballooning cost is another example of weak delivery and misallocation of subsidies by the state machinery that is eating into scarce government resources. To prove that it is fiscally prudent, the government should have announced modern market-based tools of procurement and public stocks management that go beyond ration shop automation and have proved successful in other nations.

The Economic Survey observes that the “embrace of markets” – even in the basic sense of avoiding intrusive intervention, protecting property rights, selling off unviable public sector assets, exiting from areas of comparative non-advantage and allowing producers and consumers to face market prices – is a “work-in-progress”. This is most true of agriculture. Farmers desperately need agricultural investment to generate wealth and jobs. Unfortunately, due to this intellectual hostility, successive governments have distorted the markets where the private sector operates best. And underinvested in the areas of public good where it should have been more active. The Budget is only one opportunity to set right both. Public policy can pick up where it leaves off.

DISCLAIMER : Views expressed above are the author’s own.

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Five ways Budget 2017 can facilitate farmers


Agriculture should be the focus of this year’s Budget, according to a Twitter poll conducted by the ministry of finance last week that saw some 66% of more than 21,400 respondents seeking a more agriculture-focused Budget. Not infrastructure. Not the services and manufacturing industries. But agriculture. Clearly, to enhance the ‘feel good’ factor, agriculture has to pick up. Demonetisation compelled farmers to move towards cashless payments and digitalisation. Now they need greater ‘ease of doing business’ to harness that momentum. Here are five steps the Narendra Modi government could take to make that possible.

1. Strengthen tenancy laws: Agriculture needs economies of scale. The average farm in the country is 1.15 hectares in size and will shrink further by 2020-21. According to the 2013 Situation Assessment Survey of Farmers/Agricultural Households, you can’t earn a living from a farm smaller than one hectare. To survive, majority farmers rent land. Farmland tenancy is illegal in most states. But unlike manufacturing, farmers can’t relocate to favourably inclined states. In the absence of a law, landowners don’t sign rent agreements and tenant farmers have no rights. Often, the owner leaves land fallow rather than be ‘grabbed’ by a tenant. Tenants don’t invest in the land due to uncertain tenure. A scarce resource is wasted. Legal tenancy will permit effective consolidation for farming without depriving landowners. Tenant farmers will qualify for bank loans. Digitisation of land records will further strengthen property rights and turn rural land into a bankable asset.

2. Liberalise input markets: Unlike manufacturing, farmers cannot freely import or adopt technology. Of the 140 million hectares of cultivated land, nearly 120 million hectares are degraded. Soil health cards will not lead to precision agriculture unless fertiliser, machinery and seed markets are willing to deliver the right input at the right time and the right price to the farmer.

Erratic Pulse

But the fertiliser companies won’t because the subsidy regime is choking their business. Politics has stymied new oilseed and pulses technology and distorted commercial pricing when sound science should be the deciding principle. Mechanisation gets 3% of farm credit. Until the upstream business models are corrected, farmers will be exploited by rent-seekers and counterfeiters.

3. Don’t mix producer and consumer policies: No sector can survive the kind of political risk that farmers face. Farmers themselves contribute 80% of the capital invested in agriculture. Like other businessmen, they invest in a crop after carefully considering the odds. But often, what starts as a good deal comes a cropper because midway through the marketing year, government coercively ‘corrects’ prices to protect consumers. When capital is used suboptimally or destroyed, growth weakens. Other investors shy away. Consumers should certainly be protected from food inflation. But not through knee-jerk measures that ultimately ruin rural livelihoods.

4. Encourage loans against harvests: Entrepreneurs need capital. The harvest is a tenant farmer’s only renewable asset. Especially for women farmers. Banks, however, are reluctant to lend against small quantities of a crop, with inconsistent quality, stored somewhere far. Moneylenders and middlemen, living close by, step in. Farmers should be taught crop grading and sorting on a war footing so that harvests have standard quality. A regulated electronic repository can digitally maintain records of stored physical crops. Asking financial institutions to lend against these electronic records should be the next logical step.

5. Provide access to efficient and assured markets: The market is efficient when farmers earn more and consumers pay less. Exchange platforms and other electronic markets are designed to enhance competition by connecting the largest number of buyers and sellers in the most cost-effective, transparent and regulated way. Farmer groups must be assisted to use them. Farmers also need a reliable safety net. Unlike other sectors, agricultural markets don’t self-correct. Low crop prices neither make us buy more nor prompt farmers to significantly cut production. So, farmers face long periods of low prices interspersed with flashes of high prices. Government procurement is dysfunctional as pulse farmers discovered last summer. Food ministry data shows that for wheat and rice, the maximum procurement centres are in Bihar, where purchase is negligible. Instead, market-based tools should be deployed to include more crops and farmers.

Farm is Forked

Agriculture is a unique business that aims to create a food production, processing and distribution system that is, in all stages, economically viable, socially just, and ecologically sound. The current system does not meet thesecriteria and is, thus, unsustainable. India’s small farmers face proportionally the steepest transaction costs if they wish to participate in modern food supply chains. Poor transportation, storage and communication infrastructure, no access to land, information and expertise, political risk and limited access to financing, which is rooted in the lack of collateral, all add to costs. This confines farmers to subsistence livelihoods. The New Year and Budget 2017 give us yet another chance to make things easier for them.

The writer is chief marketing officer, National Commodity and Derivatives Exchange

DISCLAIMER : Views expressed above are the author’s own.

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Another chance to get it right? 6 big trends for farmers

Pericles said the key is not to predict the future, but to be prepared for it. 2016 saw some epic power shifts and new ways of doing business. Here are the six big trends that will shape next year for farmers and consumers and give us another chance to get it right:

1. Domestic food price rise will slow down on the back of normal harvests of grains and pulses.
Weather-wise, 2017 will be another very warm year globally but is unlikely to be a new record due to the absence of additional warming from El Niño, says the UK Met Office. Higher acreage for cash crops will compensate for static crop yields. Farm wages, that have risen 15% since 2014, will correct due to the reverse migration after demonetization. But rising crude oil prices, helped by some OPEC restraint, will offset gains. Irrigation is heavily dependent on diesel gensets. So is transportation.

Farmers will be reluctant to invest capital in farm and machinery because of continued stress from unpaid crop loans and credit sales. Most leased farms are anyway starved of capital. India’s 138 million farms are highly leveraged. Discretionary spends will also falter until a good monsoon. The ripple effect will be felt by FMCG, consumer durables, automobiles, and farm machinery companies. Rural demand contributes almost 40% of their sales.

2. The stronger dollar will turn food imports expensive.
The US dollar, currently at a 14-year high, will rise further if the US Federal Reserve raises interest rates to curb inflation. All imported foods, from pulses and cooking oil, to processed foods, cheese, apples, and almonds, will become expensive. Retail prices of imported foods are typically two to three times higher than FOB export prices after adding tariffs, excise, margins and transportation costs. A stronger dollar typically pushes down global commodity prices. But Indian consumers may not see the benefit. India imported agricultural, fishery, and forestry products worth $25 billion in calendar year 2015.

3. The push towards digital payments will encourage rural financial literacy, tighter supply chains to reduce counterparty risk, and electronic mandis. Digitization will open opportunities for cost-saving automation, accuracy, speed and vastly-improved efficiency in agricultural trade documentation, storage, finance, and risk management. Supported by the right policies and market infrastructure institutions, it can transform Indian agriculture’s financing models, risk mitigation models, and distribution models.

4. Digital agriculture will begin to take root.
A combination of mobile devices (allow real-time data gathering and information dissemination), satellites and drones (provides a spatial and temporal dimension to information), Internet of Things (stitch together diverse sources of information and support delivery of farmer specific information), analytics (turn vast amounts of data into actionable information and knowledge), messaging apps, breeding informatics (accelerates R&D for genetic gain), and cloud computing (enables seamless data storage and real-time reporting across the value chain) will expand delivery of targeted and timely information and direct-to-farmer m-commerce platforms. Venture capitalists have invested $179 million between 2014 and 2015 into Indian agri-tech start-ups.

5. Organic, eco-friendly, socially responsible, and healthy will remain the big food trend.
Patanjali’s success shows consumers are making their food decisions based on where and how their foods are made, grown, raised and by whom. India spends 31% of its budget on food and grocery. Smart brands will broaden their thinking around sustainability and find creative new ways to eliminate any wasted resource. “Going back to your roots” – whether through Ayurvedic diets, traditional grains, or authentic ethnic foods and spices – is another big theme. Look out also for more vegan foods and craft beer.

6. Street-food inspired dishes in restaurants, delivery-only restaurants, home-delivery online grocery portals, meals-on-wheels, and food trucks will capture greater consumer attention. Convenience, seamlessness, relevance, value-for-money will remain important, while companies employ algorithms and machine learning to understand our habits and idiosyncrasies.

DISCLAIMER : Views expressed above are the author’s own.

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How Demonetisation Has Affected India’s Agricultural And Food Markets


A vegetable seller in Kolkata. (Photo by Debajyoti Chakraborty/NurPhoto via Getty Images)

India’s ₹17 lakh-crore agricultural and food markets, from the mandi to the neighbourhood grocer, are at a standstill. Demonetisation has vacuumed liquidity from this virtually cash-only economy that provides livelihood to half the population. Prices have crashed and fresh produce lies rotting. The situation indeed appears dire.

Business is forecast to revive only after people in 7,500-plus mandis and 600,000 villages are re-stocked with new currency. Yet, those with the courage to look beyond this doomsday scenario can spot the proverbial rainbow.

It is a myth that farmers refuse to accept cheque payment

Take farmers first. It is a myth that farmers refuse to accept cheque payment. Small dairy farmers in Andhra Pradesh accept cheques. Sugarcane farmers accept cheques from sugar factories. Moong farmers are accepting cheques from government procurement agencies. Apple farmers accept cheques from large buyers. Potato contract farmers accept cheques from food companies. Maize farmers in Nabrangpur, Odisha’s poorest district, and coconut farmers in Karnataka took cheques from state agencies. The list is growing.

In Karnataka and Andhra Pradesh, which have adopted the Rashtriya eMarketServices-run Unified Markets Platform, produce worth ₹39,000 crore has been sold with cheque payment in the last four years. The 250 mandis in 10 states that have adopted the electronic National Agricultural Market (eNAM) platform for sale of primary produce are designed for cheque payment. So far, 1.60 lakh farmers, 46,000 traders and 26,000 commission agents have been registered on the e-NAM platform.

Food Corporation of India tried but failed to pay Punjab and Haryana farmers by cheque for wheat, only because the powerful commission agents want to first deduct the loan repayment amounts.

A farmer works in his sugarcane field on the outskirts of Ahmedabad, India February 28, 2015. REUTERS/Amit Dave/File photo

Direct benefit transfer for seeds has been a success even among the small and marginal farmers of Uttar Pradesh. Moreover, of the seven crore Kisan Credit Cards issued in India, more than one crore are ATM-enabled debit cards. Farmers accept insurance and disaster relief cheques. So to portray the farmer as a Luddite is both unfair and untrue.

What’s more, marketing practices are changing in several crops, especially oilseeds, maize and certain spices. Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them. So even if the mandis stay shut until the cash shortage recedes, the farmer can still borrow against his commodity.

Farmers now have the option to store their produce in modern warehouses for a market-driven rent and take a bank loan against them

It is true that the small and marginal farmers who sell off their produce in the village itself are hurt by the demonetisation. Similarly, value chains with minimal processing and direct consumer sales such as fruits and vegetables are hit. Most fresh produce is sold by small hawkers and vegetable mongers in the streets of India. Since they take payment in cash and buy their wares from the mandi in cash, business is down. These are symptoms of the crying need for reform.

The millers and processors who have raw material in their godown to last two-three weeks are in no panic. In any case, business in the mandis has to pick up within a month. Food is not a discretionary expenditure. The pent-up retail consumer demand will eventually pull up prices sufficiently high to lure traders and re-start the market engines.

A farmer winnows wheat in a field on the outskirts of Ahmedabad, India, March 29, 2016. REUTERS/Amit Dave

Visible difference will come if the government uses demonetisation to persuade two intermediaries in the value chain — the trader and the village shopkeeper — to adopt electronic payments. All the APMC markets are regulated by state governments and used by the larger traders. They should be made cash-free.

The high incidence of indirect taxes have made it lucrative for wholesalers and distributors to stay below the radar and offer the savings as discount to consumers in a low-margin and highly competitive commodity market. Tax avoidance has become their formula for survival. A solution can be found through GST.

Visible difference will come if the government uses demonetisation to persuade two intermediaries in the value chain — the trader and the village shopkeeper — to adopt electronic payments

To convince agri-input and other merchants, the government should make it easier and cheaper for them to adopt card payment and mobile wallets on a trial basis. Shopkeepers should be educated about how they can expand business by moving from “cash only” to “cash and card” because it attracts more customers. Those customers also spend more because they are not hampered by lack of cash. Once village retailers accept digital payments, rural customers will follow. Exactly the way mobile wallets picked up with Ola and Uber. Economists call it the network effect.

It doesn’t end there. Good customer experience is the key to adoption. The biggest argument in favour of cash is its convenience. You don’t need literacy or tech savvy to use cash. Or travel miles to use an ATM. So the push for adoption of digital payments has to begin with easy documentation, quick and hassle-free KYC norms to incentivise utilisation of financial services in rural areas. Usage charges should be low and competitive so that farmers don’t find them prohibitively expensive.

Farmers ride on a motorbike in front of stacked sacks filled with grains at the Agricultural Produce Market Committee (APMC) market yard on the outskirts of Ahmedabad, India, December 1, 2015. REUTERS/Amit Dave

Electronic payment points should be available at walking distance. Users should find apps easy to use and in their local language. They should quickly receive delivery, be assured of complete back-end security and have plenty of choice. The entry of payment banks will hopefully ease some of these pain points.

Once the agricultural value chain adopts electronic payments and cleans up its books to align itself with the financial supply chain, benefits will follow. The biggest will be the inflow of private and banking capital, which is waiting to power agricultural growth, and social impact capital to improve rural lives.

Cash is an inefficient medium of exchange. The World Bank estimates that the Indian government can save 1% of the GDP annually from digitising current cash-based subsidies alone. Farmers, traders, processors and retailers will never again blindly trust cash. That makes it the perfect opportunity to prise open closed minds and introduce new payment habits in this otherwise opaque part of the economy.