Agriculture and Rural Economy: Curb Your Enthusiasm!

Sahil Kapoor Madhavi Arora Ankita Pathak

Chief Market Strategist Economist Economist
sahil.kapoor@edelweissfin.com Madhavi.arora@edelweissfin.com ankita.pathak@edelweissfin.com September 2020
Agriculture and rural green shoots add cheer, but caveats remain

 Rural sector green shoots….: While rural sector is now seen to be catching up with Urban on Covid cases, it may remain
less impacted overall. Factors like (1) healthy start to the monsoons and reservoir levels, (2) record sowing and, (3) rising
rural spending indicate that rural sector is doing relatively well. Even as agriculture sector is expected to be the growth
outlier this year (~2.9% growth) and only sectoral positive contributor to growth, we note agri share in GDP has been
falling and stands <14% now. Thus, a stronger rural sector is likely to act as a mitigator to the current downturn, albeit will
barely be able to offset it.

 …but watch out for caveats in the high frequency rural activity data: We note (1) while sowing patterns are stronger
YTD, land yields growth on an average are mere 3%, (2) Despite bumper Jun-July, tracker sales FYTD are down 4%, and
less than 1/3rd of farming community purchases tractors, (3) consumer non-durable goods growth (proxy of rural
spending) is still below trend, (4) rural propensity to consume is much lower than urban, (5) higher MGNREGA wages and
food inflation historically have not implied higher rural wages.

 Demand driven policy support to rural labor…: Given the reverse migration from urban to rural, the increased budgetary
allocation to Rs1 trillion from Rs. 600 billion to MGNREGA – a demand driven rural employment program -- is acting as an
automatic stabilizer in the expenditure side amid current cyclical slowdown. Besides, frontloading of PM Kisan have
helped as well.

 …But at the cost of labor switch and productivity: The sharp and faster correction seen in rural unemployment largely
reflects the MGNREGA impact, which still is insufficient given the job demands. However, the wage and productivity of
the urban migrant labor is much higher, which when switched to rural will only weaken rural wages. The overall job
addition since February appears skewed towards farm sector as against non-farm sector. Again, given the farm sector is
marred with disguised unemployment and underemployment, the aggregate labor productivity falls further and does not
augur well for medium term demand dynamics.
2
Agriculture and rural green shoots add cheer, but caveats remain

 Segmented labor market: Amid large reverse-migration, one can expect excess labor, reduced productivity and
downward wage pressures in the rural economy, placed alongside with labor shortages and higher wages in the urban
economy. MNREGA is a temporary solution. Over time, however, policy must enable labor migration back to the cities, to
ameliorate any urban supply shock, which will further feed into urban inflation.

 …Plus this demand substitution is not necessarily healthy: Urban wages tend to be much higher than rural, implying
much higher urban per capita value added and almost 1.8x higher monthly per-capita consumption of urban as against
rural. Thus, this substitution effect will only dent overall domestic household retail demand over a period, not to mention
falling urban remittances also adding woes to the rural source of income.

 Inefficient agriculture value chain continues to be a binding constraint: Factors like low agri capex, inadequate
warehousing facilities, MSP addiction, inefficient Agri marketing, asymmetric information, limited traction in contract
farming etc. continue to keep agriculture productivity low. Promoting rural entrepreneurship linked to local livelihood
eco-systems, digital infra push and facilitating agri-allied activities could have a much longer-term multiplier effect on
rural sector.

 Rural policy spending momentum could slow swiftly during rest of FY21: Higher rural policy thrust post Covid in the form
of direct cash transfers, NREGA etc. implied overall rural sector expenditure will be higher than budgeted in FY21,
assuming no rejig in other existing rural schemes. Centre’s agriculture and rural spending has seen a massive surge of
124% in 1QFY21 led by frontloading of budgeted expenditure and enhanced scheme allocations. However the rural
spending momentum could slow swiftly for rest of FY21 going by budgeted and enhanced allocations, unless fresh
stimulus is added for the sector.

3
Healthy backdrop for agriculture sector…but rural penetration is limited

 Encouraging sowing and rainfall pattern a plus point

 But still-sluggish farm and non-farm wages and productivity despite falling unemployment rate
 Frontloaded policy support to rural to fade in remainder of FY21 if not pumped in further

4
Healthy sowing patterns to augur well for the sector
Sowing patterns follows monsoon closely… A good monsoon generally augurs well for the sector
Sowing-% Deviation From Normal Rainfall-% Deviation From Normal (RHS)
30 Agri GVA Growth % Monsoon Deviation From Normal % (RHS) 15
50 15

10 25 10
40
5 20 5
30 0
15 0
(5)
20
%

10 -5

%
(10)

%
10
(15) 5 -10

0 (20)
0 -15
(25)
(10) -5 -20
(30)

(20) (35) -10 -25

Aug-01
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-20

FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20*
Source: CMIE, Edelweiss Professional Investor Research

 The effects of early monsoon are normalizing now, with sowing up just by 6.3% YoY as we approach the end of the monsoon
season. The actual area sown has been flattish for five years now. That said, land yields have been showing a moderate growth
averaging mere 3%

 Historically, monsoon correlates well with agri growth. With monsoon panning well, agriculture growth will be positive and a
relative sectoral outperformer but not an absolute one! We expect FY21 agriculture and allied GVA growth to be ~2.9%
5
A good monsoon to improve yield but not necessarily the pricing power

Food production to see an uptick amid healthy monsoons ..But beware of ‘Paradox of Plenty’
Area Weighted Deviation From Normal Food Grain Production-YoY Food Grain Production-YoY WPI FA YoY- RHS
25 18
25
20 16
15 15 14

5 10 12

5 10
%

%
(5)
0 8

(15) (5) 6

(10) 4
(25)
(15) 2
(35) (20) 0
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: CMIE, Edelweiss Professional Investor Research

 A good monsoon can increase yields and therefore increase production despite the area sown being flattish. However, a
higher production may lead to a lower food prices, implying lower returns for the farming community

 Without a rise in food prices and a smooth supply chain, rural consumption is unlikely to sustain

6
Higher production may not imply higher rural wages and high
disposable income
Rural wages may remain sluggish amid weak food price linkages …as domestic and global food prices also looking lower

Total rural Wage Growth Agri Wage Growth WPI Food-RHS 80% FAO YoY % WPI Food YoY (RHS) 25%
45% 25%
40% 60% 20%
20%
35%
40% 15%
30%
15%
25% 20% 10%
20% 10%
0% 5%
15%
5% -20% 0%
10%
5%
0% -40% -5%
0%
-5% -5% -60% -10%

Apr-07

Apr-11

Apr-15

Apr-19
Dec-05

Dec-09

Dec-13

Dec-17
Aug-08

Aug-12

Aug-16

Aug-20
Apr-05

Oct-06

Apr-08

Oct-09

Apr-11

Oct-12

Apr-14

Oct-15

Apr-17

Oct-18

Apr-20
Jan-06

Jan-09

Jan-12

Jan-15

Jan-18
Jul-07

Jul-10

Jul-13

Jul-16

Jul-19 Source :CMIE, Bloomberg, Edelweiss Professional Investor

Research

 Wage-food price spirals are not as strong when seen in the light of overall rural wages..

 To add to it, we think the medium term outlook on food inflation is bleak. This will be driven partly by global prices
amid healthy food stock coupled with higher production back home.

7
…lack of pick up in non-agri activities to keep lid on rural wages
With no sustained rise in new projects in manufacturing and construction sector, non-agri employment scope is bleak
New Projects Announced- Manufacturing New Projects Announced- Construction & Real Estate- RHS

Average project growth

-- Manufacturing : 50% Average project growth
250 -- Construction & Real Estate: 150% -- Manufacturing:- 2% 500
-- Construction & Real Estate: 6%
200 400
% Y-o-Y

150 300

% Y-o-Y
100 200

50 100

0 0

(50) (100)
FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
*Source: Bloomberg, Edelweiss Professional Investor Research

Source: CMIE, Edelweiss Professional Investor Research

 Rural farm income has seen a structural shift, wages and salaries now contributing 50% of farmers’ income (vs 39% in FY03).
 The share of rural employment in manufacturing and construction is 47% and 76% respectively. Both are expected to witness
a wage contraction and job losses, especially amid surplus and reverse migration of labor.
 With new activity outside of agriculture looking bleak, the case for rise in non- agri wage is unlikely to be strong enough to
pick up beyond its moderate nominal growth rate of <4% in the last 3 years.
8
 MNEGRA as a near-term rescue losing its sheen…
Rural MNREGA employment surge has tapered off …with rural labor market recovery now lagging that of urban
700 Person days work generated under MNREGA (mn) Urban employment change (m/m, mn)
40
Rural employment change (m/m, mn)
600
20
500
0
400

300 (20)
As sowing season nears its end, and
200 (40) as MNREGA DD-SS mismatch
aggravates, rural labor market
100 (60) starts bearing the brunt
0
(80)
May-14

May-15

May-16

May-17

May-18

May-19

May-20
Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20
Nov-14

Nov-15

Nov-16

Nov-17

Nov-18

Nov-19
Feb-15

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Mar-20

Apr-20

May-20
Jan-20

Jun-20

Aug-20
Feb-20

Jul-20
MNREGA demand supply mismatch increase amid high migration and Source: MNREGA, CMIE, Edelweiss Professional Investor Research

near-end of peak agri season  Increased MNREGA wages and coverage as per PM Garib
50
45 Work Supplied Work Demanded 44 Kalyan Yojana since April 2020 is acting as an automatic
Households (Millions)

39
40 36 stabilizer in current environment.
35 33 32
28
30
 Employment generated under MNREGA doubled in May
25 22 22
21
20
19 19 and the momentum has continued, helped by increased
16 16
15 11
13 12 budgetary allocation by Rs 400bn in FY21.
10
5  However amid high reverse migration in the rural space,
0
January February March April May June July August employment generated still is not adequate.
2020
9
…But medium-term rural income and productivity impact of NREGA muted
The trickle-down impact of MNREGA could help at the margin… …but disguised agri employment implies lower labor productivity
30% 500 FY18 labor productivity (INR, 000’)s
Rural Wage-YoY MGNREGA Wage- YoY

25% 398
400

20%
Farm per capita labor productivity
300 1/4 of non-farm
15%

200
10%

90
5% 100

0%
0
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
Farm Non-farm
Source: CMIE, MGNREGA site, Edelweiss Professional Investor Research Source: NSSO, CEIC, Edelweiss Professional Investor Research estimates

 Even as MNREGA comes as a quick-fix on employment front in rural sector, it would neither be sufficient nor sustainable solution in
uplifting overall rural income. MNREGA wages also have also had limited influence on rural labor market

 Separately, wage and productivity contribution of the temporary labor scheme would be lower compared to migrant labour's urban
employment. In the current context, the number of work schemes needs to be increased per panchayat, to reduce workers’ crowding
and improve efficiency.

 Thirdly, amid MNREGA demand- supply mismatch, the disguised unemployment in agriculture would aggravate further.

 We note income per farmer is around one-third of the income per non-agriculture worker in rural sector and farm labor productivity
is almost one-fourth of non-farm.
10
Direct policy income support to rural sector is helpful
Transfers to Jan Dhan accounts have seen decent uptick ...but the access and penetration still weak
%

Jan Dhan Account Deposits YoY Exclusion from PMJDY

35
All Poor Urban Rural
Probability of an adult woman not having a PMJDY a/c 56% 53% 52% 61%
30
Probability of a household not having any woman PMJDY a/c 43% 38% 37% 46%

25
Proximity to financial institutions
Proportion of adult females with access to (%) Within 1 km
Within 5 km
20
Bank branch 28 69
ATM machine 22 56
15
Banking agent or correspondent 13 31
Aadhaar micro-ATM 8 18
10
Aug-…

Aug-…

Aug-…
Apr-18

Apr-19

Apr-20
Dec-18

Dec-19
Jun-18

Oct-18

Jun-19

Oct-19

Jun-20
Feb-18

Feb-19

Feb-20
Source: CEIC, Indus action survey Edelweiss Professional Investor Research

 The direct income transfer via Jan Dhan is another swift demand driving policy support which could have a high near-term fiscal
multiplier effect to rural growth
 However as per a survey by Indus Action in June, almost 40% of Jan Dhan account holders could not access the relief package.
 Despite improving its depth over the years, Jan Dhan scheme still has remained riddled with issues of account dormancy, limited
access to banks in rural areas and patchy last-mile delivery.

11
…but rural policy spending momentum could slow swiftly during rest of FY21

Agri and rural spending to see higher-than-budgeted …but with most policy frontloading done, there could be
allocations slowdown in spend ahead
Budgetary expenditure on Agri and Rural (Rs bn)
CG expenditure growth in agri and rural development (%yoy)
4,000
FY21 Adjusted for additional rural 3,546 140
3,500 relief package Assuming most spending
120
frontloading is over, the remainder
3,000 100 of FY21 will likely see a sharp plunge
2,642
in Agri spending, even if one adjusts
2,500 80 for additional rural relief package
1,876 1,961
2,000 60
1,641
1,500 40
1,139
1,000 20
500 0

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

9MFY21E
0 (20)
FY16 FY17 FY18 FY19 FY20 FY21E
(40)
Source: CEIC, Edelweiss Professional Investor Research estimates

 Higher rural policy thrust during Covid in the form of direct cash transfers, NREGA etc. implied overall rural sector expenditure will be
higher than budgeted in FY21, assuming no rejig in other existing rural schemes
 Centre’s agriculture and rural spending has seen a massive surge of 124% in 1QFY21 led by frontloading of budgeted expenditure
and enhanced scheme allocations. This comes after a decent growth of ~30%+ in rural and agri spending in FY20.
 However the rural spending momentum could slow swiftly for rest of FY21 going by budgeted and enhanced allocations, unless
fresh stimulus is added for the sector
 Beyond cash transfers, policy support like grooming and promoting rural entrepreneurship linked to local livelihood eco-systems,
digital infra push and facilitating agri allied activities could have a much longer-term multiplier effect on rural sector.
12
Rural activity indicators seem to be sending mixed signals

 Mixed rural demand indictors; part of the rebound could be pent up demand
 The broader consumer non-durables basket remains subdued
 Urban PCE 1.8x of rural PCE, implying demand substitution to rural may be a loss to net demand

13
Mixed rural demand indicators; broad based uptick missing
Tractor sales recent uptick partly a pent up release …with fertiliser sales/production following suit
60% Domestic Tractor Sales YoY (4MMA)
15 Fertilizer production 4MMA
50%
40% 10
30%
20% 5

%
10%
0% 0
-10%
-20% (5)
-30%
(10)
-40%

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20
Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20
But a pick up in auto sales seems unimpressive
 Despite sharp surge in tractor sales growth in June and
60% Domestic 2 Wheelers Sale YoY (4MMA)
July, FYTD domestic sales are down about 4%. A part of
40% the surge could possibly be mere pent up demand.
20%

0%
 Less than 1/3rd of farming community can afford tractors.
The majority is still small and marginalized farmers with a
-20%
relatively smaller area under cultivation.
-40%

-60%
 Non Agri related goods demand is not reflecting the same
excitement in broad based fashion
Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Source: CEIC, Edelweiss Professional Investors Research 14

Rural demand can not effectively substitute for urban one
Rural spending overall is still tepid… …and can’t really substitute for urban consumption spending
Consumer non durables (%q/q,nsa) Urban/Rural monthly per capita consumer expenditure (X)
100 2.0

80 1.9
60
1.8
40
1.7
20

0 1.6

(20) 1.5
(40)
1.4
(60)
May-18

May-19

May-20
Mar-19

Mar-20
Nov-18

Jan-19

Nov-19

Jan-20
Jul-18

Sep-18

Jul-19

Sep-19
1.3

1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: CEIC, NSSO, Edelweiss Professional Investors Research

 Rural consumption proxies have shown sequential improvement as migration led to part of urban demand shifted to rural.

 Urban wages tend to be much higher than rural, leading to much higher urban per capita value added and almost 1.8x higher
monthly per-capita consumption of urban as against rural sector.
 Thus, this substitution effect will only dent overall domestic household retail demand over a period of time, especially as
urban remittances also get hit.

15
 Besides, we are seeing pick up in rural Covid cases with easing mobility

Rural contribution to total Covid case load is increasing …Reflecting in stalling of rural mobility
Rural as a % of Total Urban as a % of Total Google Mobility Trends
80 75.2 10
72.0 71.6 Rural States Urban States
67.6 0
70

% change from Baseline: 0

(10)
60
49.7 52.3 47.7 (20)
50.3
% Cases Added

50 (30)
(40)
40
32.4 (50)
28.0 28.4
30 24.8 (60)
20 (70)
(80)
10

12-Jul-20

26-Jul-20

09-Aug-20

23-Aug-20
08-Mar-20

22-Mar-20

05-Apr-20

19-Apr-20
23-Feb-20

03-May-20

17-May-20

31-May-20

14-Jun-20

28-Jun-20
0
31-Mar-20 30-Apr-20 31-May-20 30-Jun-20 31-Jul-20 31-Aug-20

Note: States with 65%+ Rural population are classified as Rural, rest are considered as Urban
Source: CEIC, Covid19.com, Google, Edelweiss Professional Investors Research estimates

 Rural economy initially fared well owing to Covid spread largely being urban concentrated. That has reversed now.

 The mobility in our proxies of rural sector dipped in July and is gaining some momentum again but is likely to be flattish hereon.

16
 …Nonetheless, agriculture will still be a growth outperformer this year
Agriculture to be the only sector to add positive growth …but unlikely to break from the average low growth trap
impulse in FY21
Contribution to GVA growth (bps) Agri GDP growth (%)
11 10 Long term average growth (%)
Agriculture Industry Services GVA growth
9
8
7
6
5
3 4

1
2
(1)
0
(3)

FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
(5) (2)

(7) (4)
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E
Despite +ve growth, FY21 Agri will likely be
lower than 20 yr average of mere 3%
(6)

(8)

Source: CEIC, Edelweiss Professional Investor Research estimates

 Agriculture will be the only sector which will add positive growth impulse to Gross value added in FY21, while industry and
services will be growth drags.

 Despite growing in the positive territory, agriculture will unlikely to able to break the low growth trap that it is stuck in for years

17
 ….but a long way to go

 Structural Issues continue to mar the sector

 Low and falling capex over the years
 MSP addiction and terms of trade implications
 Limited benefits out of efficiency driving reforms

18
Inefficient agriculture value chain continues to be a binding constraint

 Inadequate warehousing facilities: Warehousing facility for post harvest is grossly inadequate in rural areas forcing
even rich farmers to sell their products after the harvest. The problem is compounded if prices of farm products crash
post harvest, particularly amid bumper crop. Procurement operation is also limited to a few states. Cold storage is still
catching up gradually.

 MSP addiction: The share of procurement in total rice and wheat production has been increasing continuously. Any
sudden withdrawal of MSP policy is bound to create a huge disruption and possible disincentive for production.

 Inefficient Agri marketing: Competitive forces do not operate well in case of the agricultural value chain. APMC has
failed in bringing fair price mechanism with multiple layers of intermediaries/middlemen between farmers and final
consumers, implying limited fair retail price gain to farmers. Transaction Costs for farmers also remains high. Low
adoption of technology remains a challenge. Integrating Agricultural Markets with technology like E-Nam etc needed.

 Asymmetric information: Production decisions are based on limited or asymmetric information, implying wild price
swings. There is a need to empower the Farmer Producer Organizations (FPOs), which have higher scale of
production, to trade in the commodities futures market. This could lead to efficient price discovery, ability to hedge
price risks and higher liquidity for farmers.

 Limited traction in Contract Farming : Most Indian farmers are small and marginal and they don’t have the know-how
or resources to innovate in any area of production. Lack of private sector investment in agriculture R&D etc. is also
partly owing to limited direct access to small farmers of business with specific requirements regarding the quantity
and quality of farm produce.

19
Investments in Agri Have Lost Their Sheen…
There has been marked downtrend in Agri related investment …with fixed investment in crops taking maximum hit
Crops Livestock
Agriculture and allied investment (% of total Gross capital Forestry & logging Fishing
formation) 10
11.5 Total agri allied (%GFCF)
9
11.0
8
10.5
7
10.0

% of total GFCF
6
9.5
5
9.0
4
8.5
3
8.0
2
7.5
1
7.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: CEIC, NAS, Edelweiss Professional Investor Research

 Agriculture capex as a proportion of total capex plummeted sharply in early 2000s and the last five years has seen it averaging 7.5% as
against 10%+ in early 2000s

 Crops continue to be the dominant space in agri capex but over the years, their has fallen (contributing to overall fall in agri capex
share)

 Allied activities like fishing and forestry etc have seen very mild gains in overall capex over the last two decades and still remain
undercapitalised
20
…with non-public sector shying away from new agri related investments

Public investment in agriculture has increased, albeit still low …but is offset by sharp fall in household investment
% Economic agent's % share in Agri and allied GFCF
7.0 Agri allied GFCF (% of public sector GFCF)
6.8 Household sector Public sector (RHS) Private sector (RHS)
88.0 25
6.6 86.0
6.4 84.0 20
6.2
82.0
6.0 15
80.0
5.8
78.0
5.6 10
76.0
5.4
74.0 5
5.2
72.0
5.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 70.0 0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: NAS, Edelweiss Professional Investor Research

 Even as public investment has increased in agriculture in recent times, Households have shied away, keeping overall sectoral
investment weak

 Households have been the major players in the agriculture investment space, with almost ~75% share in overall agriculture an allied
investment , albeit down to nearly 86% in FY12

 Overall, Capex in agriculture remains anaemic at an average of ~2.6% of GDP in the last ten years.

21
….as terms of trade turn unfavourable for agriculture sector

Consistently weakening terms of trade of agriculture sector will lead to lower supply response over time
Agriculture terms of trade (ToT)
ToT Farmers and non farmers (Index) ToT Agri and non Agri sectors (Index) CPI food inflation (%, RHS)
110 15

105 13

100 11

95 9

90 7

85 5

80 3

75 1

70 (1)
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Note: When the value of the terms of trade index is less than 100, the relative prices are against farmers and agriculture sector
Source: Agricoop, Edelweiss Professional Investor Research

 Farmers’ lack of new capital investment in agriculture sectors is partly explained by terms of trade turning unfavourable for
farm sector.
 Both the index of terms of trade for farmers versus non farmers and agricultural versus non-agricultural sectors were rising in
the last decade and have stagnated or fallen since

 Shifting the terms of trade in favour of agriculture is the key to generating positive supply responses in agriculture and
sustaining this dynamic change 22
 ….and as agriculture sector viability remains in question

Monthly Income and Expenditure of Agricultural Households

Net receipt from Net receipt from Net investment in

Size class of land Income from wages/ Net receipt from Total consum ption
farming of animals nonfarm business Total income (Rs.) productive assets
possessed (ha) salary (Rs.) cultivation (Rs.) expendi ture (Rs.)
(Rs.) (Rs.) (Rs.)

<0.01 2,902.0 30.0 1,181.0 447.0 4,561.0 5,108.0 55.0

0.01-0.4 2,386.0 687.0 621.0 459.0 4,152.0 5,401.0 251.0

0.41-1 2,011.0 2,145.0 629.0 462.0 5,247.0 6,020.0 540.0

1.01-2 1,728.0 4,209.0 818.0 593.0 7,348.0 6,457.0 422.0

2.01-4 1,657.0 7,359.0 1,161.0 554.0 10,730.0 7,786.0 746.0

4.01-10 2,031.0 15,243.0 1,501.0 861.0 19,637.0 10,104.0 1,975.0

10+ 1,311.0 35,685.0 2,622.0 1,770.0 41,388.0 14,447.0 6,987.0

All sizes 2,071.0 3,081.0 763.0 512.0 6,426.0 6,223.0 513.0

Source: NSS 70th round 2014, Edelweiss Professional Investor Research

 For about two thirds farmers, consumption expenditure was higher than the net income received by these households

 Rising cost of cultivation, particularly labour cost and cost of inputs like fertilisers, etc., is the main reason for the non-viability
of cultivation (Eco survey 2015)

23
….with the so called price incentives failing to create any medium term
benefits
MSP and ToT linkage has weakened
 Despite significant hike in MSP for several farm products for
ToT Farmers and non farmers (Index,3YMA) five consecutive years until FY14 (implying higher ToT for agri
105 20
Effective MSP increase (%yoy,3YMA,RHS)
18 sector), the farmers saw limited gains, as middlemen continue
16 to operate in the agricultural value chain.
100
14
12  Large hikes in MSP seem to have raised retail prices rather
95 10 than pushed up farm investment, created skewed crop
8 production (in favor of wheat and rice) and ecologically
6 unsustainable farming practices in India’s original green
90
4
revolution belt.
2
85 0  Regional imbalance are prevalent as 47% of total procurement
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
of wheat and rice was from Punjab & Haryana in FY19-20.

Grains procurement and production links are weak

30 40
% in Rice production % share in Rice procurement % in Wheat production % share in wheat procurement
35
25
30
20
25

15 20
15
10
10
5
5

0 0
UP Haryana Chhattisgarh Odisha AP Punjab Rajasthan UP MP Haryana Punjab

Source: CEIC, Agricoop, Edelweiss Professional Investor Research

24
 Land productivity dynamics are still not in place
The small holding character of Indian agriculture is much more Creating sustainable and climate-resilient agricultural systems
prominent today than even before pertinent for long term productivity
800000
Average Size of Holding Total Agricultural Emissions (CO2 equivalent) in major countries (2017)
Number of Holdings ('000) 700000
(Hectare)
600000
Category of Holdings FY06 FY16 FY06 FY16
500000

Gigagrams
Marginal (Less than 1 83694 100251 0.38 0.38 400000
hectare)
(64.8) (68.5) 300000

Small (1.0 to 2.0 23930 25809 1.38 1.4 200000

hectares) (18.5) (17.6) 100000
Semi-Medium (2.0 to 4.0 14127 13993 2.68 2.69
0
hectares)

Argentina

Australia

Indonesia

India
Mexico

Brazil

China
Russia

US
Ethiopia

Pakistan
(10.9) (9.6)

Medium (4.0 to 10.0 6375 5561 5.74 5.72

hectares) (4.9) (3.8) Source: FAO, Edelweiss Professional Investor Research

Large (10.0 hectares and 1096 838 17.08 17.07

above) (0.8) (0.6)  Livestock such as cows, agricultural soils, and rice production are
leading to high agri led greenhouse gas emissions.
129222 146454 1.23 1.08
All
(100.0) (100.0)  Climate change is threatening India’s food security with frequent
Source: Agricoop, Edelweiss Professional Investor Research
dry spells, heat waves and erratic rainfall, adding to farmers’ woes

 The share of small and marginal farmers in land holdings is high at 86%  There is a need to cut down carbon emission by implementing
efficient use of fertiliser, adoption of zero-tillage and management
 The average size of holdings in India declined from 2.3 ha. in FY71 to 1.33 of water used in rice irrigation
ha. in FY01 to 1.08 in FY16
25
Formal credit penetration and scope still has scope to improve
Bank Credit to agriculture has been falling… …and penetration of institutional credit still low
40 Agri allied credit growth (%) Agri allied (% share in bank credit, RHS) 14.0 Agency-wise share of rural loan outstanding (%)
35 Institutional Non-institutional
100
13.5
30 90
30.6 32
80 38.9 44
25
13.0 70
20 60

12.5 50
15
40
69.4 68
10 30 61.1
12.0 56
5 20
10
0 11.5
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
1991 2002 2012 2017E

Source: CEIC, Edelweiss Professional Investor Research Source: NSSO 70th Round, Edelweiss Professional Investor Research Estimates

 Despite innovative policy measures like priority sector lending, RRB, Kisan credit cards, interest subvention etc., the coverage
and flow of institutional credit to rural areas have been far from satisfactory. Farmers’ dependence on non-institutional credit
had gone up significantly over the years as per NSSO’s last survey. However our calculations suggest improvement since then.

 But that said , the share of agriculture has fallen sharply in banking sector credit, also reflective of slumping agri credit growth
in recent years.
26
However, policy makers have started focussing on agriculture efficiency

Direct + below-the-line fiscal measures taken post Covid in Atmanirbhar plan of GoI Fiscal support (Rs bn)

Total direct + indirect Direct

Agri and allied infrastructure allocations

Agri Farm gate infrastructure fund (NABARD set up) 1,000

Micro food enterprise and Local food clusters support 100 100
Fisheries activity enhancement scheme 200 200

Animal disease control and Vaccination of livestock (Rs 133bn to be used from existing budget)

Animal husbandry and Dairy infrastructure fund 150

Herbal and medicinal plant cultivation spread over two years 40 20
Bee keeping support 5 5
Top to total scheme: Support for vegetables farming 5 5
Efficiency reforms
Removal of major food items from Essential Commodities Act
A Central law to improve marketing choices and selling options for farmers
Total 1,500 330
Source: GoI, Edelweiss Professional Investor Research estimates

27
...as seen in recent policy reforms aiming at improving farm productivity
Policies/ reforms
E-NAM
PM-KISAN
Amendment of Essential Commodities Act (ECA 1955)
Pradhan Mantri Krishi Sinchai Yojana
Pradhan Mantri Fasal Bima Yojana
Farming Produce Trade & Commerce (Promotion and
Facilitation), Ordinance 2020
Farmers (Empowerment & Protection) , Agreement on Risky and inefficient farm input & output management
price assurance and farm services ordinance 2020
Agri investment fund
FPOs
Issues to tackle
Asymmetric and discriminatory marketing and transaction
processes
Small and marginal farmers' inabilities to procure inputs or sustain
Imposition of the curbs on stocking of farm produce and regulation distribute and supply commodities.
of the prices of commodities
Regulatory interferences leading to weak price realisation and low Investment in cold storages and modernization of the food supply chain
agri marketing infra in cold storages , processing etc
High dependency on monsoons for irrigation
Insufficient institutional crop insurance and protection amid
natural calamities, diseases and pests
Inefficient Agri marketing
Farm inefficiencies and barriers exist in sale and purchase of agri-
produce outside APMCs of respective states and only to registered
licensees of states
Limited farm sector apetite to absorb market unpredictability
Lack of post harvest infra and assets of farming sector
Weak socio-economic development linkages and insufficient
wellbeing of agrarian communities
Policy aim
Market integration e markets first at the level of the States and eventually across the country
through a common online market platform, to facilitate pan - India trade in agri commodities
Direct bank cash transfers of an amount of Rs 6,000 per year, in three equal instalments, to all
landholding farmers irrespective of the size of their land holdings.
Deregulate agriculture commodities to encourage the freedom to produce, hold, move,
Harness economies of scale and attract private sector/foreign direct investment into the agri
sector.
Improve entrepreneurial spirit and thus investment in the farm sector.
To improve on farm water use efficiency by adopting water management techniques such as
precision-irrigation and others to reduce wastage of water.
Enhancing recharge of aquifers and introducing sustainable water conservation practices.
To stabilise the income of farmers to ensure their continuance in farming.
To encourage farmers to adopt innovative and modern agricultural practices.
To ensure flow of credit to the agriculture sector.
To create One India, One Agriculture Market with an ecosystem where the farmers and
traders would enjoy freedom of choice of sale and purchase of agri-produce and also
supplement the existing MSP procurement system
To also promote barrier-free inter-state and intra-state trade and commerce outside the
physical premises of markets notified under State agricultural produce marketing legislations.
Electronic trading in transaction platform for ensuring a seamless trade electronically.
Set up a separate dispute resolution mechanism for the farmers.
Eliminating intermediaries resulting in full realization of price.
Adequate farm protection by providing effective dispute resolution mechanism with clear
timelines for redressal and enhance transfer the risk of market unpredictability from the
farmer to sponsor.
To access modern technology and better inputs which will reduce the cost of marketing and
improve income of farmers and attract private investment for supply chains
To provide medium - long term debt financing facility for investment in viable projects
Setting up storage and processing facilities, which will help farmers, get higher prices for their
crops.
To enhance productivity through efficient, cost-effective and sustainable resource use and
realize higher returns through better liquidity and market linkages for their produce and
become sustainable through collective action.
Source: GoI, Media reports, Edelweiss Professional Investor Research
28
…but any sustained efficiency gains require efficient rural factor allocations
Agri labor force still accounts for rural bulk employment
 The quality of rural employment, as is evident with the Sectoral share in employment in rural areas (%)
status of employment, and extent of disguised Agriculture Manufacturing Construction Services
100
unemployment has deteriorated. 13
21
3
 Sluggish rural employment is partly due to inability of non- 80 7
13
farm rural sectors to absorb the labor-force leaving
60 9
agriculture
 Horticulture and agri-marketing chain remain under-tapped 40 76
 Need to impart skills and technical know-hows to the largely 58
20
unskilled agricultural labors in the rural areas in order to
accelerate non-farm employment 0
FY00 FY19

Farm to non-farm productivity disparity rising again …with casualization still a high component in rural employment
Sector and Area-wise Type of Workforce
Disparity in per worker income
4.5 Rural Urban
Non-farm worker/Agri worker % share in respective Self Regular/sal Self Regular/sal
Casual Casual
4.0 employment category employed aried employed aried
Agriculture 73.9 4.7 49.9 10.5 0.5 9.3
3.5 Mining & Quarrying 0.1 1.1 0.8 0.1 0.8 0.4
Manufacturing 6.5 20.0 4.7 22.8 23.6 17.1
3.0
Electricity 0.1 1.8 0.1 0.7 1.7 0.2
2.5 Construction 1.9 3.2 40.0 4.7 2.5 51.7
Trade,hotel & resturants 10.9 13.3 1.0 34.6 17.9 7.6
2.0 Transport,storage & communications
3.0 12.7 2.3 12.3 9.8 8.1
1970-71

1980-81

1993-94

1999-00

2004-05

2011-12

20017-18

Other services 3.5 43.3 1.2 14.3 43.2 5.6

(E)

Total 100 100 100 100 100 100

Source: NAS, NSSO, FY18 estimated using 2012 constant prices, Edelweiss Professional Investor Research Source: NSSO, RBI, Edelweiss Professional Investor Research
29
In conclusion: Baby steps welcome but long way to achieve sustainable
sectoral gains
 Rural and agriculture sector green shots come with underlying caveats
 Demand substitution to rural may be a loss to net demand given urban PCE is 1.8x of rural PCE
 Rural policy spending momentum has seen sharp uptick but could slow swiftly during rest of FY21 and
dent sequential demand in rural sector
 Policies like MNREGA could help keep rural unemployment low but medium-term rural income and
productivity impact of NREGA muted. Besides, reverse migration puts downward rural wage pressure
 Sustainable high wages in rural sector will require genuine pick up in non-farm activities, given
construction and manufacturing share is rural employment is growing
 Despite growing in the positive territory and being a positive growth contributor in FY21, agriculture
will unlikely to able to break the low normal growth trap that it is stuck in for years
 Overall, a stronger rural sector is likely to act as a mitigator to the current downturn, albeit wont be
able to completely offset.
 Low hanging fruits have been worked upon to improve farm and non-farm sector productivity but we
have a long way to go before self- sustainability is achieved in the sector.

30
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Date: 2020.09.08 19:17:19 +05'30'
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