Two years after demonetisation was announced, rendering 86% of currency in the system invalid, the big impact seems to have been on rural India in two ways – one, the relative erosion of rural agricultural wages; and two, the fall in bargaining power of farmers in receiving an attractive price for their produce.
Both may have contributed to the crisis in many parts of rural India.
Farmers and rural workers are unhappy and their discontent could play an important part in next year’s general elections.
Two set of statistics, ratio of agricultural and non-agricultural wages and difference between rural and urban food inflation, support this.
The Indian economy does not have a credible short-term wage series for people in urban areas. One way to gauge wage trends in the urban economy is to look at rural wages.
Higher demand in the urban labour market generates tailwinds for rural wages, especially for non-agricultural workers.
A robust agricultural sector, on the other hand, will lead to a reverse situation and agricultural wages will close their gap vis-à-vis non-agricultural wages.
Large part of the United Progressive Government’s (UPA) 10-year term saw an increase in the ratio between agricultural and non-agricultural rural wages.
This is in keeping with the narrative of high farm growth and the effect of schemes such as the rural employment guarantee programme during that period.
It is widely accepted that the rural employment guarantee scheme provided subsistence wages to the rural workforce without having to migrate to urban areas.
This trend was disrupted towards of end of the UPA’s second term and eventually reversed when the present government assumed office in 2014.
It needs to be kept in mind that both 2014 and 2015 were also rainfall deficient years.
It is natural to expect that agricultural activity and hence demand for labour would have been subdued in drought years.
Agricultural wages picked up again in early 2016, probably aided by normal rainfall after two years.
However, demonetisation killed this short phase of recovery.
The ratio remained flat for five quarters beginning December 2016 and then came down.
This suggests that agriculture has become relatively unattractive for workers in the post-demonetisation phase.
If non-agricultural rural wages are to be taken as a proxy for labour demand in the urban sector, this trend can be interpreted as the rural economy becoming less competitive vis-à-vis the urban sector.
Another indicator can be used to test this thesis. Food items are the main product offered by the rural economy to the urban economy.
So, a higher food inflation means that the rural economy gains vis-à-vis the urban economy.
This author had pointed out in an earlier article that the recent rise in inflation has been coming from non-food items in the Consumer Price Index (CPI) basket, which is the benchmark inflation measure in India.
If urban food inflation is growing at a faster pace than the rural measure, it would suggest that farmers are better off selling their produce to cities than in villages.
Similarly, a higher growth in rural non-food inflation compared to urban non-food inflation would mean an advantage to the urban economy.
An analysis of quarterly inflation numbers since March 2012 shows that growth in rural food inflation was greater than or equal to the growth in urban food inflation in 21 out of 27 quarters.
The rural non-food inflation growth has been greater than or equal to its urban counterpart in 26 out of these 27 quarters.
These numbers capture the general advantage of the urban economy vis-à-vis the rural economy in India.
Our calculation of urban non-food inflation has excluded the housing component of urban CPI, as rural CPI does not have this commodity group.
There is one remarkable different between the period before and after demonetisation in the comparison discussed above. Between March 2012 and September 2016, growth in rural food inflation was less than its urban counterpart 26% of the times.
This halved to 13% from December 2016 onwards, which is also the period after demonetisation.
This suggests that rural India suffered further erosion in its already weak bargaining power in the post-demonetisation period.
The bargaining power of farmers was always low, but demonetisation amplified it.