A P: Indian agriculture - Where to?

Agriculture may turn out to be the most underappreciated driver of India's structural growth acceleration over the coming decade

For most international investors looking at India from the outside, they very rarely if ever think about the agriculture sector here. The most common assumption is that the agriculture sector in India will grow at about 2 per cent per annum (average for the last decade), or even lower, and that India will be able to hit a growth trajectory of 7-8 per cent per annum despite this drag. Most of the new investors into India do not even consider the sector relevant to their decision making, blissful in their ignorance. In no investor conference does the topic even merit a guest speaker. Whatever little interest investors have in the space is largely confined to trying to predict the fate of the monsoons.

This lack of interest in trying to understand the agriculture sector is manifest in the fact that I have not seen a single detailed report on this (at least over the last five to six years) from any of the large foreign research houses. Quite remarkable really this lack of information or interest, considering that even today the agriculture sector is about as large a component of GDP as manufacturing and employs 60 per cent plus of our labour force. If the agricultural sector could grow at 4 per cent plus instead of the trend rate of 2 per cent, this alone may be enough to take Indian GDP to an 8 per cent growth trajectory (taking into account the direct and indirect benefits of higher agriculture growth). This possibility alone makes it worth studying.

In the context of the above I came across an interesting research report on the subject written by Narendar Nagpal and Krishan Daga of Deutsche Bank India. They make a case that Indian agriculture is at an inflection point, poised to change and accelerate its growth dynamic. While the report may not cover much new ground for someone familiar with the rural economy, it was an eye-opener to someone like me who very rarely looks at this area.

The report first outlines the usual ills afflicting the agriculture sector, viz. small fragmented holdings, limited use of modern technology, continued dependence on rainfall, declining public investment, poor availability of credit, and archaic laws. All this is well known and does not cover new ground, but what is interesting in the report is the section detailing how and what is changing.

The report classifies change into four parts, with the most important being at the policy and legislation level. Here the central government has devised model laws and is incentivising the states to modernise and update local rules and regulations. It talks of a new Agricultural Produce Marketing Committee (APMC) Act, wherein farmers are no longer required to buy and sell produce through designated market places. Under the new model law private sector companies will be able to set up new market places, and food-processing companies will be able to interact and buy directly from farmers bypassing a whole layer of middlemen. Contract farming also becomes much more of a reality in the new set of rules. The report points out seven states have passed amendments to their APMC Acts and another 14 are poised to do so. Six more states have circulated draft laws based on the model.

The government has also proposed a new integrated food law, which will hopefully simplify the maze of 16 different laws currently governing the food-processing industry. The integrated law will also bring food processing under the purview of one single unified regulator as opposed to subjecting the industry to the fancy of 6-7 different regulators as under the old regime. The report also details proposed changes in the Essential Commodities Act and the Warehouse Receipt Act, all of which simplify the regulatory environment for agribusiness.

A second broad theme is the rising corporate involvement in Indian agriculture. Whether it is an ITC or an HLL, which has always been involved in agriculture as a means to lower their costs of critical inputs, or new participants like Sunil Mittal and the Thapars, agriculture is now seen as a viable business opportunity by many. This trend will get only accentuated as food retailing in India gets increasingly organised, and the large food chains start sourcing directly from the farmers.

The third change is in the area of technology, which is improving the price discovery mechanism available to farmers. Whether it is through the setting up of commodity exchanges or the spread of the ITC e-choupal network, farmers now have access to global prices and a wider and more timely dissemination of critical price information.

The implications of all this change are quite significant and far-reaching. First of all, as the private corporate sector gears up to enter agriculture, one should expect significant investment in horticulture, an area where India has competitive advantages. Food processing is also underdeveloped and one should expect large investments in setting up the infrastructure to enable national movement of agri produce and reduce wastage and rent seeking by middlemen.

But by far the most important implication of all of the above in the long term will be the cleaning up of the existing supply chain and intermediary networks. This will enable food prices to decline but simultaneously allow farmers to improve their economics by capturing a larger chunk of the pie. A combination of falling food prices and rising farmer incomes will lead to rapid growth in rural consumption, and form the basis for acceleration in rural GDP. Productivity will improve in agriculture as farmers through increased incomes will have the resources to invest in increased mechanisation and use of modern agri inputs.

While the whole world is going gaga over how much more balanced growth is in India compared to China (where investment to GDP ratios are over 40 per cent), imagine how much more durable and powerful our growth metrics would be if one saw a surge in rural consumption and farmer prosperity. Hitting growth rates of 7-8 per cent for a decade would actually look reasonable.

The report is interesting as it showcases many reforms taking place in the agriculture sector quietly and slowly, away from the glare of publicity. If the conclusions of the report that these reforms taken together will accelerate growth in the agriculture sector to 4 per cent and boost rural consumption are correct, then most investors need to understand this space much better. It will have implications for individual stocks as well as any sector dependent on consumption.

Agriculture, long the poor cousin in India's growth equation, may actually turn out to be the most underappreciated driver of India's structural growth acceleration over the coming decade.