Impact of Demonetisation on farm prices

What is the issue?

The demonetisation and the consequent restrictions in cash flow have changed the nature of farm prices.

Click here to know about Impact of Demonetisation after an year.

What is the recent shift in price trends?

• Price stickiness refers to a situation where the price of a good does not change immediately when there are shifts in the demand and supply.
• Agricultural commodity prices in India have traditionally exhibited “downward stickiness”.
• This refers to a tendency to move up easily at the slightest demand-supply imbalance but prove quite resistant to moving down.
• However, post demonetisation, this long prevailed resistance seems to have been disturbed.
• And the tendency now is for prices to be increasingly “sticky upward” i.e. resistance to move upward.
• Evidently, the prices of major crops are falling as well as reaching significantly lower levels than the officially-declared MSPs.
• However, crops like paddy and wheat have escaped price declines, mainly because of assured MSP-based procurement.
• Exceptions considerably apply to onions and tomatoes as well, the prices of which have increased.
• However, these exceptions are due to varied regional effects like drought and reduced plantings by farmers, heavy rains during the time of harvesting, etc.

What is the reason for the shift?

• Inflation- One reason is the central government’s commitment to keep food prices under control.
• This is complemented by its agreement with the RBI to keep annual consumer price inflation within a 4-6 % range.
• The inflation target and the resultant restrictions are presumably keeping the prices lower.
• Restrictions - Evidently, the last three years have seen a series of pre-liberalisation era controls on the agricultural trade.
• These include:
  1. imposition of stocking limits on traders and processors.
  2. restricting exports even while allowing duty-free imports.
  3. ordering income-tax raids on alleged hoarders.
• All these have imparted a downward bias to farm prices, while not allowing any corresponding upward adjustment.
• Demonetisation - The impact during the demonetisation roll out and the lingering effects even after cash has returned to the system are one of the prime reasons.
• The transactions between the agricultural mandis and the farmers are largely through the physical cash mode.
• The income-tax department restrictions on daily cash withdrawals or deposits (Rs 2 lakh) make it harder for the traders to pay in cash.
• The immediate cash payments are crucial for the framers to purchase inputs for the further cycles of farming.
• There is also a qualitative difference between currency that used to earlier float freely and the cash of today.
• Due to these factors, there is a slowdown in all agriculture related transactions which in turn is leading to depressing effect on the overall farm prices and farm incomes.
• The transition from a regime of “downward stickiness” to “upward stickiness” has relevance beyond just economic jargons and needs more policy attention.

Source: Indian Express