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.