How to urgently provide cash to farmers

In the aftermath of demonetisation, the agrarian economy that was largely cash based stands crippled. Farmers’ produce is not being procured at mandis ; it has no takers, credit channels are choked and farmers are unable to get cash to buy seeds and fertilisers for the rabi crop.

At one stroke, ₹14 lakh crore of cash has been rendered illegal. Are there practical and pragmatic measures to provide relief to the 263 million farm and rural households whose very livelihood is at stake?

The only relief allowed to the farmer has been to permit withdrawal up to ₹25,000. Another small step has been extending the time to pay crop insurance premiums by 15 days. This is of little help for farmers who often rely on cash from local money lenders and not banks.

Most farmers have already availed of their farm loan and consumption loans for the previous season. What is needed is substantial relief to farming households to enable them to sell their current kharif harvest, and be able to purchase agri-inputs for the next sowing season. Non-purchase of the current kharif harvest, in addition to wreaking havoc with the farmer’s livelihood, will cause a shortage of grains, pulses, fruits and vegetables in the market and push up prices.

At the popular Koyambedu vegetable and fruit market in Chennai, daily sales have dropped to ₹2-3 crore from ₹6-7 crore, according to traders. A similar dip is seen at the Azadpur mandi in Delhi. The farmer not having any liquidity also means, he is not be able to purchase any agri-inputs for the next season, and the repercussions of majority of the nation’s farmers not sowing any rabi crop, will be massive to say the least.

There is the need to inject at least ₹5 lakh crore to reach a minimum level of normalcy into the economy. With only ₹70,000 crore of fresh currency having been injected in the first 10 days, a simple calculation tells us that reaching the minimum level of normalcy will take a minimum 4-6 weeks even as per the Government’s own admission.

The rural economy cannot wait that long. There is need to restart the farming cycle, and get the rural economy back on track immediately. What can be done is the following:

Allow APMC mandis transactions using old ₹500-1000 notes — all APMC mandi transactions are documented, as mandi cess has to be paid and mandis are regulated entities. We must allow the farmer to be able to come and sell his Kharif harvest at his nearby APMC mandi, and the trader/ arthiya should be officially and legally allowed to pay him using the old ₹500/1000 notes. As all transactions are documented, and overseen by mandi officials, there is minimal risk of money laundering to take place.

This will ensure the fast-drying up of the agri supply chain to gets replenished in time, keeping a check on supply and prices, and also ensure that that no harvest goes to waste. Such transactions are already taking place illegally and inflating commodity prices. Cotton prices, which had come down to around ₹38,000 per candy (of 356 kg) during early November, are now ruling at ₹41,000 levels.

To complete the cash cycle, farmers should be able to purchase agri inputs using this cash received from the mandi after sale. Giving the farmer old notes will serve no purpose if he is asked to go and spend days trying to exchange/deposit the same in the bank. The sowing cycle has been badly disrupted due to the farmers’ inability to purchase inputs and can have far reaching impact if not fixed immediately. Co-operatives such as IFFCO should be allowed to accept old notes from farmersand provide them with agri-inputs for rabi.

The credit cycle in the rural areas also stands disrupted. The bank coverage in rural areas is limited. The NBFCs and NBFC-MFIs are thrown into distress as their customer segment comprises of women and members who are all around the poverty line or just above. Since the bank coverage in rural areas is limited, the cash repayments to rural NBFCs and NBFC MFIs in defunct currency should be legitimised so that the credit cycle can be completed and the financially distressed do not get unduly burdened.

The RBI directive against district cooperative banks from handling defunct notes has come as an additional blow to the rural economy. Farmers holding Kisan Credit Cards (KCCs) have been denied the facility of making transactions at district cooperatives banks. This decision has blocked farmers' funds in States like Madhya Pradesh where sowing is going on and 67 lakh farmers have their accounts in cooperative banks and societies while 52 lakh farmers have KCCs. A decision to permit all cooperatives to accept the old currency would also provide large support to the PDS shops that work under these cooperative banks.

The writer is MD & CEO of National Collateral Management Services

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