India: Supermarkets gain from demonetization pain
India’s cash crunch may have become a blessing in disguise for traders who supply to supermarkets, but the removal of 500 and 1,000 rupee notes has taken its toll on farmers, consumers and traditional wet markets.
Indian Prime Minister Narendra Modi announced the policy last year in a bid to stamp out corruption and a black market economy that keeps these notes stashed for tax evasion purposes.
“India largely still is a wet market profile instead of a supermarket profile, and still many wet market people have not been able to equip themselves for digitalization yet,” says Tarun Arora, director at one of the country’s leading fruit importers IG International.
“They are still not able to equip a GPRS-enabled swipe machine or mobile banking or other means of payments. That is not helping people.”
He adds supermarkets are gaining more fresh produce volume as a result.
“It’s a very good sign for the supermarket business to establish into India. We’ve seen them being very stable with very slow growth that has happened. But in the last two months I’ve seen supermarkets making more sales than they used to do.
Arora’s comments are echoed by INI Farms chief executive officer Purnima Khandelwal
“In fact they [supermarkets] were the ones who saw an increase in business because a lot of people who were otherwise buying from small mom and pop shops moved to these retailers who were accepting payments by credit card or debit card,” she says.
Shifting to cash-free trading
As a grower and trader of pomegranates and bananas with sales both in India and abroad, INI Farms is now reaping the fruits of a move away from cash several years ago.
“We made an initiative where we started to convert all our farmer relationships to having bank accounts and to be able to do an online transfer into their account,” she says.
“So there was absolutely no problem for us in the farm level sourcing of fruit, because we have a check and online system of payment.”
“Typically even for daily wage labor we work with contractors, who are compliant with all the labor laws.”
However, Khandelwal says the group was hit by the cash crunch to some extent.
“We have about 500 hectares of our own pomegranate plantations, so therefore for the daily expenses to some level the teams were not able to withdraw cash that was being deposited into their accounts,” she says.
“In the initial days, transportation was hit because for a lot of the supply chains we use both for domestic sales and outbound the truck drivers had to pay tolls,” she says, clarifying this was difficult without small notes, leading to long lines of traffic at toll stations.
“We had orders from supermarkets but we were unable to supply to them because the transporters weren’t working.”
Thankfully the government took away the tolls, and also announced gas stations could accept old currency, she says.
“So they made movements seamless, and after four or five days it was business as usual for us.”
“On the sales side though, given you still have to have wholesale operations, that was slightly hit for us because the wholesale operations went slow because there was not enough liquidity in the system…that actually took some beating.”
While INI Farms made the switch to a digital system prior, the dramatic post-demonetization shift for IG International is remarkable and perhaps indicative of broader trends underway in the economy.
Arora says before the announcement around half of IG’s business was done in cash, and 40% was through banking.
“Now banking would probably be 60-65%, 15% would be swiping of the card and mobile banking and all the platforms, and 20% is cash.
“That has been quite a transition in the last two months.”
While IG International has adapted well to the situation, in fact notching a 25% uptick in year-on-year sales in recent weeks, Arora acknowledges the situation has not been easy for many but believes the economy will benefit in the longer term.
He describes a scenario where sales were down in wet markets and sometimes either farmers or traders could not be paid.
“The primary reason was the demonetization. That led to frustration and then that frustration led to in some places vegetables even being offered for free, just to show the government they’re not able to make money,” he says.
“But I think it was a transitional phase…it was not in the cities, it was more in the rural areas where this undue advantage was being taken of the farmers, but things have settled down and people are not talking as they were earlier.
On a consumer level, he says the most affected were people without skills in or access to modern technology.
“However now it is reached to the point where people who are not too good with technology are trying to learn, and are applying for a new credit or debit card, or are trying to download an app to their smartphones so they don’t become handicapped in certain situations.”
The demonetization’s “very strong impacts on the farmers”
Pratik Mutha of grape and pomegranate grower-exporter Agrion Overseas paints a bleak picture of the measure’s impact on rural India, but like Khandelwal and Arora he also thinks it will bring long-term benefits.
“Considering the facts that large part of India’s population depends on the agriculture and its allied sectors for their livelihoods, the demonetization of 500 and 1,000 rupee notes dooms the sowing activity, sales of harvested crops and difficulties in payment to farmers and farm laborers,” he says.
“Reports suggest that vegetable and fruit prices have declined by 50% in spot markets in India.
“As rural India still largely depends on cash, cashless transactions are still improving at a very slow pace. Banking in rural India too is not developed when compared to urban areas.”
He says the government has however taken a few solid initiatives to help farmers during this “arduous period”.
“Farmers are permitted to use old 500 rupee notes for purchasing seeds from any state or central government outlets and agri universities on the production of proof of identity,” he says.
“It also increases in withdrawal limit for farmers to 25,000 rupees per week against crop loans sanctioned and credited to their accounts.”
He says the effects of demonetization on agriculture can also be seen in other areas like people’s purchasing power, which has decreased and has resulted in less movement of produce in markets.
“The exploitation of agents or middlemen continues due to the anxiety of farmers to sell their produce immediately,” he says.
“Farmers are facing issues in affording transportation for their produce.
“Though the government initiated steps towards better rural cash flow, the majority of farmers still rely on private moneylenders, which resulted in a monopoly by them to lend loans at higher rates.”
He emphasizes that despite these issues, the future can be better for farmers.
“With the likely eradication of black economy, the farmers will move to government institutions for loans and also there are high chances of eradication of agents or middlemen in the markets through cashless transactions.
“Due to long-term effects of demonetization, the economy will likely to be improved which results in high exports of agricultural produce.
“Overall, the demonetization is showing negative impacts on agriculture at present, but it is likely to improve conditions for the farmers and other stakeholders in the future.”
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