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Impact of India's demonetization on domestic agricultural markets

Author

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  • Nidhi Aggarwal

    (Indian Institute of Management, Udaipur)

  • Sudha Narayanan

    (Indira Gandhi Institute of Development Research)

Abstract

In this paper we estimate the impact on domestic trade in agricultural commodities of India's demonetization exercise that invalidated 86 of the currency in circulation. Using data on arrivals and prices from close to 3000 regulated markets in India for 35 major agricultural commodities for the period 2011-2017, we focus on short term effects up to 3 months after demonetization, tracking both the impact and recovery. These 35 commodities account for an overwhelming share of land under cultivation and value of production and hence are representative of Indian agriculture in more than one sense. Using earlier years as comparison years, we use a combination of difference in differences techniques and synthetic control methods to identify the causal impact of demonetization. We find that demonetization has displaced domestic agricultural trade in regulated markets by over 15 in the short run settling at 7 after recovery at the end of the 90 day period after demonetization. Trade in perishables was displaced to the extent of 23 in the week following demonetization. It recovered slightly by the end of 90 days, but was still 18 lower than the usual. Most of this decline is on account of the significant decline in prices rather than of arrivals, which appear to have recovered over a period of three months. There are significant differences across commodities but almost all of these are in expected ways. The impacts are sharpest for kharif crops where government intervention is minimal or absent and for perishables and least for crops where farmers are well organized or commodities which governments actively procure. Robustness checks and falsification tests support our findings to a large extent. Overall, it seems to be the case that the monetary contraction embodied in demonetization significantly impacted arrivals and prices, though the price impacts are perhaps more lasting. The findings from this analysis and anecdotal evidence from field visits suggest that the impacts of demonetization potentially have effects that could last beyond the immediate impact.

Suggested Citation

  • Nidhi Aggarwal & Sudha Narayanan, 2017. "Impact of India's demonetization on domestic agricultural markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2017-023, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2017-023
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    Cited by:

    1. Ritambhara Singh & Mahesh R. Prajapati, 2020. "An agribusiness perspective of demonetization in central region of the state of Gujarat in India," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 9(1), pages 1-20, December.
    2. Chanda, Areendam & Cook, Justin, 2019. "Who Gained from India’s Demonetization? Insights from Satellites and Surveys," MPRA Paper 95762, University Library of Munich, Germany.
    3. Karmakar, Sudipto & Narayanan, Abhinav, 2020. "Do households care about cash? Exploring the heterogeneous effects of India's demonetization," Journal of Asian Economics, Elsevier, vol. 69(C).
    4. Gabriel Chodorow-Reich & Gita Gopinath & Prachi Mishra & Abhinav Narayanan, 2020. "Cash and the Economy: Evidence from India’s Demonetization," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 57-103.
    5. Jahira Debbarma & Hyoungsuk Lee & Yongrok Choi, 2021. "Sustainable Feasibility of the Environmental-Friendly Policies on Agriculture and Its Related Sectors in India," Sustainability, MDPI, vol. 13(12), pages 1-14, June.
    6. Fouillet, Cyril & Guérin, Isabelle & Servet, Jean-Michel, 2021. "Demonetization and digitalization: The Indian government's hidden agenda," Telecommunications Policy, Elsevier, vol. 45(2).
    7. Bappaditya Mukhopadhyay, 2019. "Consumer Confidence and Lasting Effect of Demonetisation," Review of Market Integration, India Development Foundation, vol. 11(1-2), pages 54-92, April.
    8. Edoardo Chiarotti & Nathalie Monnet, 2019. "Hit them in the Wallet! An Analysis of the Indian Demonetization as a Counter-Insurgency Policy," IHEID Working Papers 03-2019, Economics Section, The Graduate Institute of International Studies.

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    More about this item

    Keywords

    demonetization; agricultural markets; India; difference-in-differences; synthetic control;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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