On April 9, the Agriculture Produce Marketing Committee in Kalwan town in Maharashtra’s Nashik district took an unusual decision: starting April 14, traders buying onion or grain must pay farmers in cash and not through cheque.

Until November 2016, transactions in Kalwan’s agriculture markets, like in much of the country’s informal economy, were conducted entirely in cash. Often, the trade was as much off the books as on them.

Then, the Narendra Modi government banned Rs 1,000 and Rs 500 currency notes. Almost overnight, the cash stocks of traders were extinguished. With new currency notes taking long to enter the market, the liquidity crunch forced traders to switch to cheque payments. This was in line with one of the stated goals of demonetisation: to shift India to a cashless economy.

In February 2017, the Union Budget introduced a cap of Rs 2 lakh per day on cash transactions between individuals, further cementing the transition to cheque payments.

The problem is, several farmers and traders explained, a cheque takes a minimum of eight to 10 days to clear, if not 15 to 20 days. Farmers end up making multiple trips to banks, first to deposit the cheque and then to claim the cash, or end up taking loans when cash is not immediately available.

There are other complications with cheque payments. In the second week of April, the police in Manmad, also in Nashik district, registered a case of fraud against three traders for allegedly cheating 157 farmers by giving them cheques that bounced. The farmers had not received their dues for three months.

“With cheque transactions, we do not know immediately if traders are cheating farmers because of the delay in processing the cheques,” said Ravindra Hirey, secretary of the Kalwan Agriculture Produce Marketing Committee. “With cash, farmers can recirculate the money in the market immediately.”

Beyond the concern for farmers is anxiety about the state of the market itself.

In the months after demonetisation, many traders who were unable to absorb the shock either reduced the volume of their trade or left the market for good. This meant the income of the market, which earns 1% on every transaction, dropped. A return to cash transactions is hoped to bring back the buoyancy.


Convenient cash

Those who support a return to cash cite the contrast between Pimpalgaon Baswant and Lasalgaon, both large market yards where onion is traded in Nashik district.

Lasalgaon is ordinarily India’s largest market for onion. Last year, onion arrivals at Pimpalgaon Baswant inched closer to Lasalgaon’s in the period between March 1 and April 15. This year, for the same period, arrivals in Pimpalgaon Baswant were more than double that of Lasalgaon’s. The last time Pimpalgaon Baswant overtook Lasalgaon was in 2015.

The reason? Cash, traders claim.

Pimpalgaon Baswant switched back to cash payments within 40 days of demonetisation after some hard negotiations with the Pimpalgaon Merchants Cooperative Bank to continue supplying them cash. Lasalgaon stuck to cheque payments.

“Pimpalgaon is the only major market in Nashik district to remain with cash,” said Kailash Ghade, a trader at the market. “This was a decision we as traders took.” It helped that the market is serviced by several branches of nationalised and private banks, apart from cooperative banks run by merchants, giving it greater access to cash supply.

Ghade attributed the increase in onion arrivals at Pimpalgaon Baswant to cash transactions. “Farmers want money in hand immediately,” he explained. “They do not want to wait for cheques. That is why they come here.”

Rakesh Pagar, a farmer at the Kalwan market, agreed. “We do not keep much money in banks because we don’t know when we will be able to get cash from them,” he said. “When we get cheques, we withdraw the money immediately because we need it for our work.”

If traders at Pimpalgaon Baswant have a complaint about cash it is that they do not have enough of it to buy as much as they used to. “We are now buying only as per orders we have in hand,” Ghade said. But the situation is better than last summer, when traders delayed stocking onion as much as they normally would for sale during or after the monsoon. This year they have begun to slowly build their stocks for post-monsoon sale.

In Lasalgaon, the chairman of the Agriculture Produce Marketing Committee said traders there “are ready for cash”. “But until banks make cash available,” Jaydatta Holkar added, “cash payments cannot be regular. As of now, traders pay cash when they have cash.”

The market’s average daily cash requirement is Rs 2 crore to Rs 3 crore, which banks are unable to provide regularly, Holkar said. Incidents of theft related to cash have been on the rise as traders attempt to rebuild their cash stocks. On Tuesday, a trader withdrew Rs 9 lakh from Axis Bank and was robbed on his way home. This was the third such incident in April, Holkar said, and it has made traders wary of cash.

Though traders would prefer cash if they had access to it as they did before demonetisation, they seem to have found a silver lining in cheques. As in the case at Manmad, traders can use cheques to delay payments, sometimes for a month or more. This gives them more time to find buyers willing to offer them higher prices.

'Farmers want money in hand immediately. They do not want to wait for cheques. That is why they come here,' says Kailash Ghade, right, a trader at Kalwan market. Photo credit: Mridula Chari

Fewer traders

Another lingering effect of the note ban, traders and farmers at different markets said, is that there are fewer active traders now. Kalwan, for one, had 10-15 grain traders. There are only two or three active now, said Jaywant Pagar, a trader at the market. Its onion market had 40-50 traders; only seven to eight remain now. “Five years ago, there used to be 20 regular traders,” he said. “Now the market is over.”

While he blamed this on a general downturn in agriculture markets, traders at the far bigger market of Pimpalgaon attributed this to demonetisation. Indeed, traders at four markets in Nashik district spoke about payments still due to them from people they had contracted to sell produce in other parts of the country at the time of the note ban.

One trader at Deola market had just returned from Kolkata, trying to find an exporter who owes him Rs 25 lakh since that November. Many traders at Lasalgaon, Pimpalgaon Baswant, Kalwan and Deola had stories of similar frauds. Some took bank loans to repay their own debts to farmers. Others folded.

At Pimpalgaon Baswant, one buyer said he had been a “minor trader” for around four years when the note ban hit. “All my payments stopped after demonetisation,” he said. “I had 10 trolleys stuck in one place, 10 in another, and at the end of it I had no money to pay farmers and had to give up my licence.”

He refused to give his name or allow a picture to be taken because he was now operating under another trader’s inactive licence by paying him a commission of 4%. Purchasing another mortgage for the licence – a guarantee against fraud by traders – will cost him Rs 15 lakh to Rs 20 lakh, he said. It may take him years to spare that much money after clearing all his debts, he added.

Cross-state trade has also declined, although farmers and traders were unable to quantify this. “Earlier, traders from out of town used to buy our produce,” said Mahesh Sonawane, a farmer near Kalwa. “Now it is only the local traders who buy from us and even they are not as many.”

All this will necessarily affect agricultural prices. “If there are fewer traders, then prices go up and down much more because it depends on how much they can buy at the time,” Ghade said. “With more buyers, the markets are tight.”

Of course, demonetisation is not the only reason for this downturn.

As far as onion, other vegetables and fruits go, since the Maharashtra government allowed farmers to sell outside markets run by Agriculture Produce Marketing Committees, the volume of trade in such markets has reduced. At the same time, the state has prohibited traders from charging farmers a commission fee, resulting in traders driving prices down to retain their profit margins. The central government has capped cash transactions, limiting how much traders can buy. The Goods and Services Tax, rolled out last year, has affected the prices of oilseeds as orders from oil mills have decreased, traders said. The tax is not applicable to food crops.

'Now it is only the local traders who buy from us and even they are not as many,' says Mahesh Sonawane at Kalwan market. Photo credit: Mridula Chari

Persisting shortage

In Kalwan, not all traders are pleased with the Agriculture Produce Marketing Committee’s decision to return to cash. They complain that they have been unable to rebuild their cash stocks after demonetisation as banks are still stingy with giving hard currency. “Earlier we used to buy up to Rs 1.5 lakh worth of produce through cheque,” said Jaywant Pagar. “Now if we have to return to cash, where will we get that from?”

Recently, the trader said by way of example, he went to the bank with a cheque for Rs 3 lakh. He was given Rs 20,000 and asked to return for the balance later.

In fact, the State Bank of India’s branch in Abhona, a village in Kalwan block, pushed back immediately after the market committee announced its decision to return to cash transactions. The bank wrote to the president of the local onion traders’ body the same day, advising that they should keep as many transactions cashless as possible as the Reserve Bank of India had instructed banks to do so since demonetisation.

The Abhona branch gets cash from the State Bank of India’s Kalwan branch, which also faces a currency shortage, said the letter of which Scroll.in has a copy. “RBI is also not providing remittance to them despite follow up with RBI,” it reads.

Bankers at the Kalwan Merchants Cooperative Bank were more sanguine. “We have no shortage of cash for now,” an official said. “There might be a shortage in a few days, but we will have to wait and see.”

A solitary tractor remains at Pimpalgaon market at the end of a trading day. Photo credit: Mridula Chari

Wide impact

The aftershock of demonetisation has not spared agriculture business outside the yards of Agriculture Produce Marketing Committees either. The owner of a shop selling seeds, pesticides and fertilisers in Nashik city sounded morose saying his business was down 50%. This reporter, at 4 pm, was the first outsider to enter his shop all day, he rued, and that was unusual even for this time of the year.

Shops such as his in cities do not sell to farmers on credit, said the proprietor who asked not to be named. Even if farmers are paid in cash at the Nashik market, they prefer to retain it and buy goods on credit from shops in their villages.

The proprietor used to operate his business on running loans from banks, that is, taking one loan to pay off the previous one. With the note ban extinguishing his stock of ready cash and reducing his income immediately, he was unable to pay back his loan and he is now heavily in debt. “I used to be able to give my customers credit earlier,” he said. “Now I am myself so much in debt, I cannot let even the people I know pay me later.”