How Demonetisation Destroyed Mandis Tue, 14 Nov 2017

How Demonetisation Destroyed Mandis

Demonetisation hit the domestic agricultural markets like a truck. It is by now well-established that the measure was ill-thought and the majority of people’s lives were disrupted. But what is less well-documented is the disruption caused in markets, especially farmer’s markets like mandis. To be blunt, demonetisation was a wrecking ball to such markets and caused wide-scale suffering.

How do Mandis work?

Currently, farmers are mandated to trade their crop in designated markets called mandis with licensed intermediaries. In a typical process, the farmer brings his produce to the market and takes it to an agent of his choice. After unloading his stock, bids are collected. During the designated time to trade, an auction is held where the highest bidder wins. After the farmer has also accepted the price, the stock is weighed and a bill is generated. The bidder or trader pays the money to the agent, who after deducting a commission and mandi fee, pays the farmer. Most of these transactions are conducted in cash. Thus payment occurs at two steps – first from the bidder/trader to the agent, and then from the agent to the farmer. Despite some bank transfers and crude credit relations (like short term loans etc), the majority of transactions are carried out with cash. Hence when demonetisation was unleashed, both these ‘steps’ were overwhelmed and effectively tanked the mandi system.

The Overnight Impact

With the cash crunch, the demand and supply of commodities in the markets nosedived. Demand fell because bidders did not have enough cash to pay for the produce, and the supply crashed because farmers were unwilling to accept the old Rs 500 and 1000 banknotes. There was a drastic reduction in the daily footfall of bidders and the arrival of new produce in mandis. Perishable commodities saw a decline in trade of 22% overnight in response to the shock. Even after 90 days, these crops were trading at 18% below their initial volumes. Non-perishables trade also declined by 11% in the aftermath. Trade in Soyabean fell by an astounding 69% in the subsequent weeks while Coriander seed was the most hit, falling by an astronomical 82% over the same period. Cotton trade also fell to 30,000-40,000 bales a day from the usual 1.5-2 lakh bales per day, a fall of 80%.

Inexplicably, the government decided to implement the policy just after the harvesting of kharif crop and before the planting of the rabi crop. Hence due to the evaporation of cash, farmers were unable to buy the necessary inputs like seeds needed to plant the next crop. The disruption in the mandis also closed off that avenue to acquire the required funds needed for seeds.

Perishable commodities experienced a sharp fall in prices because the farmers were left hapless and had to accept whatever was being offered for fast withering produce. Prices of tomatoes and onions in some states went down by 85% and 83% respectively. Such low prices might not have even been enough to recover the cost of production, let alone buy enough seeds for the future crop. For many farmers, their only source of livelihood was now lost.

Still feeling the effects

Demonetisation was a structural shock to the mandis and devastated the farmer’s markets. Even after a year, farmers are living on reduced incomes. It has increasingly become clear that demonetisation was a poorly conceived policy that hampered India’s growth story. How can progress be claimed if the people are actually worse off than before?