By Pushkar Moni and Purvee Khandelwal
The currency (notes) is the most liquid legal tender issued by the RBI which can be used to extinguish a public or private debt. The Indian economy, until 8th November 2016 had an estimated ₹14.18 trillion worth of currency notes in circulation, making India predominantly a cash-based economy. The Indian agrarian economy which is also primarily cash based, and is highly unorganized, has emerged as a source to route black money, back into the system both in terms of tax exemptions and channelling funds to create legitimate funds . According to the Central Board of Direct Taxes, only 3.81% of the total Indian population pay income taxes and it is suspected that enormous sums of money are tied up in illegal transactions that are unaccounted for. These illegal transactions not only form a parallel economy in the country but also distort the actual Indian economy. As a countermeasure, the Government of India hitherto referred to as GoI, enacted to demonetize (strip a currency of its legal status) its currency notes of 500 and 1000 denomination. These denominations accounted for 86%  of the total currency in circulation. This paper intends to highlight the effects of demonetization on the Indian agrarian economy.
Impact of Cash Crunch on Agriculture
Agriculture is primarily a cash based sector with large capital input. This sector contributes about 15% to the Indian GDP and employs about 49% of the total workforce. The real growth rate of the sector is reported to be 1.3% . This low growth rate is usually attributed to the droughts experienced in the past two years.
Fig 1- Source: Key Economic Indicators, Office of the Economic Advisor
* Note: For 2016-17, the number represents prospective growth figures.
In India, November marks the harvesting of the Kharif crop and sowing of the Rabbi crop. Rabbi crops (wheat, barley, mustard, sesame and peas) account for half of the total crop output, that is, 112 metric tons. Around 263 million of India’s farmers are dependent on cash transactions for buying seeds, fertilizers, and fuel. Since rabbi seeds are usually self-pollinated, farmers need not buy seeds every year. However, they are recommended to buy new High Yield Variety (HYV) seeds for better harvest, but due to the current cash crunch, the few willing farmers may refrain from doing so. The area under cultivation, sowing pattern, productivity, and markets has directly been affected. As of November 2016, 79 lakh hectares of land is under rabbi cultivation (an increase of 8.8% since the year 2015) and only 20% of the sowing have been completed in crop producing states like Maharashtra, Punjab, Gujarat, Tamil Nadu and Karnataka. The move to demonetize and the subsequent cash crunch has created an inability to secure financing to the much-unorganized agriculture sector for both harvesting and sowing the subsequent crop cycle.
Perishables, vegetables and fruits, in most markets exhibited a drop in market arrival as well as a fall in prices post demonetization as much as around 4% to 5%. According to the data available on Agmarknet, daily arrivals of tomatoes in wholesale markets in December 2016 was 54 percent higher than November 2016 likewise, in Maharashtra it was 48 percent higher in the month of December than in November in 2016. Thus prices dived due to the glut in the market. Eventually, farmers are at a loss which will have a cumulative effect.
Due to the prevailing conditions, rabbi crop output may increase by 6.02% . But, lower sales of quality seeds and lesser use of fertilizer can cause 1.06%  decline in the output.
Impact on Macro variables
Demonetization has certainly been reflected in the slashed estimates for GDP of the third quarter by the banks.
Chart 1- Source: Media Report, CARE
CRISIL, who has mapped the agrarian growth to the gross domestic product (GDP) predicted that a sub-normal monsoon, like the previous two years, shall keep the GDP around the 7.3% growth mark . Demonetization is being regarded as the third year of low monsoon due to its similar effect with regard to production and consumption despite 2016 being a year of normal rainfall.
Fig 2-Source: CSO, CRISIL Research
Now, going by this co-relation, and corroborated by the report of the Planning Commission we can expect the Indian GDP to remain in the sub 7.3% range which is lower than the projected growth for 2016 of 7.6% by the International Monetary Fund. A trend analysis of the same also confirms the deviation that the Indian GDP faces.
Chart 2: Projected GDP of 2016- QoQ
Agriculture amounts to about 50% of the industrial output (tractors, two-wheelers, agricultural equipment, etc.) and about 26% service sector GDP.The lowering of GDP by 0.3% shall affect the related manufacturing sectors as well. The Nikkei PMI Index for India dipped to 49.60 for December 2016, a sharp fall from 54.4 as recorded for October 2016. The current PMI is close to the all-time low of 48.50 in August 2013, when the economy faced record high fiscal deficit and the Indian Rupee slid to its lowest historical price at 68.85 per dollar. Predictably, this dip coincides with demonetization. To put things in perspective a 0.3% dip amounts to almost INR 5,631,001,289. 
This cycle can possibly take almost two to three quarters to stabilize as the GDP growth in the third quarter (September-December 2016) and the first quarter of 2017 (January-March 2017) can be significantly lower than expected. Another factor to be noted is the lower rural income in these quarters due to losses incurred.
This shall significantly reduce the consumption factor in the GDP function-
GDP = C + I + G + NX
Continuing with the food supply shock, the lowered agricultural production shall promote imports and cause a trade deficit in the BOP account. The increased imports shall depreciate the Indian Rupee further than the current Rs.68.31 per dollar. Note again that this already is close to the all-time low of 68.85 per dollar. This can mean increased cost of other imports too. The major Indian imports include crude petroleum, gold, coal briquettes, diamonds and petroleum gas among other things. Crude petroleum, coal, etc. are the prime drivers for almost every industry. An increased cost for these shall put an upward push on the Producer Price Index (PMI) which will eventually trickle down to the Consumer Price Index (CPI).
Fig 3: Effects of food supply shock
However, due to lowered personal discretionary consumption following the cash crunch, it can be expected that the inflation will not get out of hand initially. However, it is the authors’ opinion that around October 2017 the CPI shall be on the higher side of 5.05%  partially owing to the aforementioned reasons of trickle down inflation.
The government of India took many measures to ease the woes of the farmers. Firstly, the limit for withdrawal was set up to Rs.25, 000 per week against crop loans sanctioned and credited to their accounts subjected to loan limits. As an extended relief, the government allowed the farmers to use the old Rs.500 notes for purchasing seeds from any state or central government outlets as well as any agriculture studies institute. However, as only 20%  of the farmers hold PAN Card, it may be difficult for them to exchange the currency.
The rural bank NABARD has announced to disburse $3.07 billion through cooperative banks so as to help the farmers sow winter crops. Also, 250 local wholesale markets in 10 states have already adopted Electronic National Agricultural Market (eNAM)  platform to sell the produce by accepting cheque payment.
Impact on Overall Rural Economy
Though agriculture forms a major part of the rural and national economy, it’s not the only contributor. Demonetization also affected the allied agricultural industries like tractor manufacturers, farm equipment manufacturers, etc. along with the overall village economy. The cash crunch and lower penetration of electronic payment services in the rural sector has significantly reduced the buying power of the rural consumer at least in a short-medium run. This has compressed the demand for sectors ranging from transportation, consumer durables, to perishable items like fruits and vegetables . Since there is a contraction in demand a fall in prices can be expected, however, if the supply is too compressed in the subsequent quarters due to lack of production in the 3rd quarter, there is a possibility of a hike in prices.
The other recourse is that of a line of credit in the current scenario. People may start trading on credit basis in hopes of realizing the cash flow when the liquidity situation improves. This shall lead to a spike in prices as the interest on the credit will be realized through the end consumers. In any case, a price spiking trend cannot be ruled out as discussed.
Impact of Budget 2017
The budget looks to lower the pain caused by demonetization to incomes and spending in the predominantly cash driven rural sector. The farm sector and its allied non-farm sector has been allocated a credit of Rs.10 trillion, which has made way for spending on soil testing, contract farming, MNREGA, setting up of dairy-processing, and selling and distribution of produce, interest subsidy, irrigation, and crop insurance with 26.5% of all farmers covered as of December 2016. The budget proposes to increase the coverage of eNAM to 585 wholesale markets from the current 250 with an assistance of Rs 7.5 million for each eNAM.
Demonetization, though a noble and sudden change in monetary policy with a lot of shock value, from an agrarian viewpoint seems like a counter-intuitive move as it will cause inflation and lowered overall rural GDP in the coming year. The depreciation of the Indian rupee will further add to the woes of the Indian consumer while adding to the balance of payments account deficit.
It is our opinion that involving NABARD and other rural co-operative banks in the demonetization drive, so as to exchange the outdated notes quickly could have prevented the sudden cash crunch in the agrarian economy. Further, the Electronic National Agricultural Market (eNAM)  platform can be advanced so as to involve online payment modes as well, that is, link it through Unified Payments Interface (UPI).
The steps taken by the GoI like the seven crores Kisan Credit Cards issued for insurance can be linked for direct benefits transfers for quality seeds. For this to be achieved efficiently, electronic payment points should be available at a walking distance and users should find apps easy to use preferably, in their local language. Once the agricultural value chain implements electronic payments to align itself with the financial supply chain in the country, benefits will definitely follow. Capital aids from private ventures and banks will power agricultural growth, and socially improve rural lives. This along with a better monsoon as witnessed in 2016 could go a long way in ensuring lower food prices and thereby decrease in inflation. The aim to revive fortunes in the agricultural economy and the rural infrastructure seems to be the primary motivation of the Union Budget announcements this time, as evinced in higher allocations for MNREGA and PMAY. Increase in credit availability, the focus on micro-irrigation and dairy-related activity will bolster rural incomes and support consumption demand. The allied industries to agriculture like the makers of consumer goods and durables, two-wheelers and tractors would also get the much-needed push and this will surely add to the overall GDP of the country. 
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About the authors:
Purvee is a Computer Engineering graduate and is currently pursuing PGDM in Finance at TAPMI. Her areas of interests are Economics and Corporate Finance. On graduation, she wishes to pursue a career in the FinTech industry. You can reach her at email@example.com
Pushkar is an Industrial Engineering graduate from Manipal Institute of Technology and is currently pursuing PGDM in Finance at TAPMI. His key areas of interest involve the study of non tangible financial drivers on the stock market and economy. With his engagements at TAPMI he hopes to excel in the field of wealth management. You can reach him at firstname.lastname@example.org