I visited the Amul factory at Anand, Gujarat at the beginning of this year. While the visit was significant for understanding the business model of Amul, it added to my curiosity and keenness in knowing and understanding the rural economy of our country in great detail. Also, through an interaction with one of the staff members, I could understand how the decision of demonetization brought in disaster and disruption to one of India's best examples of a robust cooperative movement!
Before we move to the decision, let us first understand the famed 'Cow to Consumer' model of Amul. The cooperative movement begins in villages where families agree to participate and milk their cows and/or buffaloes and bring the milk to the milk collection centre. In almost all the villages, this is a daily exercise. Each milk producer brings in the milk, and he/she is paid as per the fat content in the liquid. It is significant to note that every family is paid as per the fat content of their milk, and they DO NOT compete with each other in prices. (Amul provides feed and veterinary service for the cattle so that they produce more milk and these families can increase their earnings). In most of the places, the participating families get paid in cash once every five days. The milk is then transported to the District Union, and from there it reaches the Gujarat Cooperative Milk Marketing Federation, which is Amul. GCMMF then manufactures various dairy products and sells them to us customers.
Before we jump onto the demonetization impact, let us admit to a few things of rural India. The rural Indian landscape does not have the same density of bank branches as compared to their urban counterparts. Of the limited number of banks present, the number of private sector banks is close to nil (especially in very remote villages). In many villages, people spend an entire day travelling to and from the bank and hence their visits are once or twice a month. A visit to a bank for a daily wage labourer implies a sacrifice of that day's wage, and hence it requires meticulous planning. Whether you agree on it or not, but cash becomes a way of life in all these villages.
Demonetization sucked out close to 86% of the cash from the market, and the management at Amul decided to transfer the money to the bank account of the participating milk producers. It was not possible to pay these milk producers by cash as there was a shortage of currency notes in the market. But it changed the equations for the participants. They got the salary, but they had to travel to those banks to withdraw the cash. However, there was a cash shortage, and long queues greeted them when they reached the bank. Also, they could not go to work on that particular day and had to either wait there for another day or get back home and do the same travelling exercise the next day. The result? Loss of daily wages for more than one day (at least). This affected their spending and loss of productive hours. As there was an absence of cash, economic activity slowed down, and it also led to an overall decrease in demand. The participating milk producers requested Amul to not transfer money to their bank account and instead get back to the mode of payment as before, that is cash! However, the cash shortage continued for close to seven to eight months, and it resulted in losses for many dairies, and Amul's business also suffered.
While people in the cities thought that the crisis (if they felt it was a crisis) of demonetization had stopped when cash was refilled in their neighbouring ATM centre, the picture in rural India was more dismal and horrible. Loss of daily wages, delay in accessing money, reduced demand - all cumulatively crippled the rural economy. As I end this article quoting what Amul wrote in its Annual Report for 2016-17, I request you all to think- what did the exercise of demonetization actually achieve?
"Demonetisation by the Indian government in November 2016 has affected our industry too. Due to demonetisation, our dairy witnessed considerable losses in business as farmers shifting to private vendors for want of cash. Distribution of Amul products was adversely affected due to decreased demand in the market."
Before we move to the decision, let us first understand the famed 'Cow to Consumer' model of Amul. The cooperative movement begins in villages where families agree to participate and milk their cows and/or buffaloes and bring the milk to the milk collection centre. In almost all the villages, this is a daily exercise. Each milk producer brings in the milk, and he/she is paid as per the fat content in the liquid. It is significant to note that every family is paid as per the fat content of their milk, and they DO NOT compete with each other in prices. (Amul provides feed and veterinary service for the cattle so that they produce more milk and these families can increase their earnings). In most of the places, the participating families get paid in cash once every five days. The milk is then transported to the District Union, and from there it reaches the Gujarat Cooperative Milk Marketing Federation, which is Amul. GCMMF then manufactures various dairy products and sells them to us customers.
Before we jump onto the demonetization impact, let us admit to a few things of rural India. The rural Indian landscape does not have the same density of bank branches as compared to their urban counterparts. Of the limited number of banks present, the number of private sector banks is close to nil (especially in very remote villages). In many villages, people spend an entire day travelling to and from the bank and hence their visits are once or twice a month. A visit to a bank for a daily wage labourer implies a sacrifice of that day's wage, and hence it requires meticulous planning. Whether you agree on it or not, but cash becomes a way of life in all these villages.
Demonetization sucked out close to 86% of the cash from the market, and the management at Amul decided to transfer the money to the bank account of the participating milk producers. It was not possible to pay these milk producers by cash as there was a shortage of currency notes in the market. But it changed the equations for the participants. They got the salary, but they had to travel to those banks to withdraw the cash. However, there was a cash shortage, and long queues greeted them when they reached the bank. Also, they could not go to work on that particular day and had to either wait there for another day or get back home and do the same travelling exercise the next day. The result? Loss of daily wages for more than one day (at least). This affected their spending and loss of productive hours. As there was an absence of cash, economic activity slowed down, and it also led to an overall decrease in demand. The participating milk producers requested Amul to not transfer money to their bank account and instead get back to the mode of payment as before, that is cash! However, the cash shortage continued for close to seven to eight months, and it resulted in losses for many dairies, and Amul's business also suffered.
While people in the cities thought that the crisis (if they felt it was a crisis) of demonetization had stopped when cash was refilled in their neighbouring ATM centre, the picture in rural India was more dismal and horrible. Loss of daily wages, delay in accessing money, reduced demand - all cumulatively crippled the rural economy. As I end this article quoting what Amul wrote in its Annual Report for 2016-17, I request you all to think- what did the exercise of demonetization actually achieve?
"Demonetisation by the Indian government in November 2016 has affected our industry too. Due to demonetisation, our dairy witnessed considerable losses in business as farmers shifting to private vendors for want of cash. Distribution of Amul products was adversely affected due to decreased demand in the market."
