Nearly 40% of loans taken by agricultural households come from informal sources, shows data
New Delhi: Demonetisation of high value currency has impacted the rural and agriculture sectors in several ways. In the days following Prime Minister Narendra Modi announcing withdrawal of Rs500 and Rs1,000 notes, trade in wholesale markets took a hit due to the acute cash crunch and farmers resorted to distress sales of perishables like fruits and vegetables. There were concerns that the cash crunch will impact planting of winter crops but that is settled now since farmers have managed to sow their fields.
The fact that agriculture markets did not collapse entirely and supply chains are functional is likely because transactions are taking place on the basis of credit, barter and trust. Most of these shocks are short-term in nature and are likely to normalise once the supply of paper currency is restored.
However, in the long run, it remains unclear how demonetisation will change the informal credit market in rural India. The numbers are staggering here. Nearly 40% of loans taken by agricultural households come from informal sources with moneylenders advancing 26% of the credit, shows the situation assessment survey of farm households released by the National Sample Survey Organisation (NSSO) in December 2014. For marginal land-holding households, the numbers are more skewed with just 15% of the credit coming from formal sources like banks and cooperatives.
So will the shortage of paper currency lead to shrinkage of informal loans?
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