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The Big Picture – How Will Government Tackle the Crisis in Rural Economy?



The Big Picture – How Will Government Tackle the Crisis in Rural Economy?



In a breather for farmers across the country ahead of the onset of rabi season, Economic Affairs Secretary announced that farmers can withdraw up to Rs.25000 per week from the payment that they receive for agricultural produce in the form of a cheque or RTGS. Further, the Government has decided to increase the time limit for payment of crop insurance premium to 15 days. The Finance Ministry will also allow registered traders at mandis to withdraw up to Rs.50000 per week to meet the labour cost. These are some of the steps that have been taken by the Government to ease the problems faced by farmers.

Problems and Possible Solutions:

Demonetization has affected the rural and farming economy very deeply. This is the busiest agricultural season of the year as simultaneously many things are happening i.e. farmers are taking their produce to the market, they are ploughing their lands, buying seeds from the market, sowing season is on therefore, they would need fertilizers and water. For any single month, this month is a period when the farmers require the maximum amount of linkage with the economy either as sellers or as buyers. The farmers are unable to take their produce to mandis and sell them, the buyers are either not buying them or buying them on credit or they have to sell their produce at distress prices. It has to be understood that one cannot change the payment habits overnight i.e. from primarily what is a cash economy to a plastic economy. The methods adopted seem to be quite inadequate to deal with the crisis presently. Cash liquidity needs to be injected in the rural economy.

It does not address the basic problem which is availability of a banking system in rural India. In rural areas, the baking system consists of a branch, an ATM and a business correspondent. The third layer i.e. the cooperative banks are kept out of the system. Cooperative banks have not been involved and have been prohibited from accepting the old currency or being given new notes. The rationale is that the cooperative banks which have a deep network in the rural areas cannot be monitored properly and this might become a way to black money conversion. The management of most of the cooperative banks is controlled by politicians of a respective area.

The banking system in the last 8-9 years has gone through two different transitions the first being expansion of ATMs. There are very few ATMs in the rural areas and most of them are concentrated in urban areas. The second transition was digitization assumed to make people visit the bank branch only for specific purposes. The branches have never been expanded and recruitment of personnel has been less resulting in very few people in the rural branches. Some branches never remain open for the whole week and some are transitory branches which are open to meet the requirements of Jan Dhan and others. Government needs to extend the time period for depositing of money for rural branches. They need to distinguish between the rural and urban branches while doing this so that benefit reaches the rural population.

It needs to be seen here that the mandis have traditionally been a source of black money. Most of the trade happens there by avoiding taxation. Since the traders there are not a part of the banking system or taxation system, there is no accounting. This has to be taken care of by the concerned authorities.

The cash flow at the moment has completely been disrupted and there is a fear psychosis among people especially in the rural areas because farmers cannot wait for normalcy to be restored in a few months without disrupting the farm economy completely. Black money circulation could have been stopped without withdrawing 86% of the cash and only demonetizing Rs.1000 currency note. Even today, the only way liquidity can be achieved completely is actually by having a partial rollback i.e. allowing Rs.500 currency note to be a legal tender for some time.


The decision taken is a momentous one which needed a strong political will taking into account the fact that some inconvenience will be caused to the citizens of the country. But, it has also to be kept in mind that the nature, frequency and amounts of the commercial transactions involved within the rural sections of the economy necessitate cash transactions on a more frequent basis and normalcy has to be restored as soon as possible.