IGIDR Working Paper:Impact of India’s demonetization on domestic agricultural markets

NO : WP-2017-023

AUTHOR : Nidhi Aggarwal and Sudha Narayanan

TITLE :  Impact of India’s demonetization on domestic agricultural markets


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.

Keywords : demonetization, agricultural markets, India, difference-in-differences, synthetic control
JEL Code :  E5, E51, Q02, Q11, Q13

Weblink : http://www.igidr.ac.in/pdf/publication/WP-2017-023.pdf