Note ban threatens to change rural narrative
Latest News »
- Antrix-Devas deal: Court to take cognisance of chargesheet
- Defence firms eye billion-dollar chance for ‘made in India’
- DGCA notice period norms for pilots may hit airlines’ expansion plans: CAPA
- Wreckage of lost ship USS Indianapolis found after seven decades
- Tepid credit growth: RBI data missing non-bank, debt markets
The cash crunch and the resultant shock to the rural economy are threatening to undo the feel good factor created by better monsoon rains and the prospects of a record kharif harvest.
Channel checks and ground reports by analysts say perishable crops have seen a sharp drop in prices.
Emkay Global Financial Services Ltd’s visit to Gujarat shows that the downward pressure on crop prices is due to higher production of kharif crop, not demonetization.
But JM Financial Institutional Securities Ltd’s ground report from seven states points out that the price drop is not entirely due to the rise in kharif crop production. Agricultural markets saw a sharp drop in trading volumes and liquidity constraints impacted realisations. Small farmers who require funds and lack access to banking facilities sold their agriculture produce at a discount. “Our interactions across villages clearly highlighted that liquidity challenges led decline in mandi trading, impacting realisations for the Kharif crop. The adverse impact on income has been more prominent in the case of small/marginal farmers,” JM Financial said in a note.
The reduced cash flow combined with a slowdown in economic activity (reducing non-farm incomes), has led to cuts in farmer income estimates for the current fiscal. JM Financial qualifies that the estimated growth in small farmers’ income is still better than the actual rise in recent years. But the estimates are based on normalization of cash flow by the current crop (rabi) harvest. Expectations are that a good winter crop will ease cash flow pressures and bring normalcy back to the rural economy.
But the recovery may not be straightforward. Ambit Capital Pvt. Ltd’s interactions with agriculture commodity traders show that non-perishable commodities have seen purchases in large quantities by people to park unaccounted money. As the winter crop harvest hits markets, traders expect these hoarders to offload goods, potentially impacting prices, Ambit Capital says.
That said, demonetization has healthy approval rates and has raised expectations of a change in policy execution (like less corruption), JM Financial says. According to reports, cheques and digital payments are gaining traction. But if the current pressures do not ease and price correction fears play out, then consumption in the rural economy can be hit, warranting relief measures by the government.
Channel checks by IIFL Institutional Equities found that demand for agriculture inputs have come under pressure. JM Financial heard instances of farmers using lower quality seeds and agro-chemicals. Large farmer families are said to have reduced consumption.
Elara Securities (India) Pvt. Ltd, which visited Kisan Agri Fair at Pune, says farmers are down-trading in consumer staples due to lack of liquidity. Many of them do not plan to invest in farm equipment and this had made dealers a worried lot.
Of course, these reports do not cover all of India and the situation can change with a rise in cash levels in the economy. But if normalcy does not return quickly, earnings of companies dependent on the rural economy can be hit.