Industry Trend Analysis - Rising Budget And Reforms To Support Long-Term Sector Growth - MAR 2018

BMI View: The outlook for India's agribusiness sector is positive for the 2017/18 and 2018/19 seasons. Looking at public policy, Narendra Modi's government has been allocating increasing funds to the sector aiming at increasing farm income and modernising agriculture. Although most programmes will take years to yield results, these ongoing reforms will support slow yield improvement and keep production on a broad uptrend.

The outlook for India's agribusiness sector is positive for the ongoing 2017/18 and upcoming 2018/19 seasons, amid relatively good monsoon rains in 2017 and the ongoing rise in public spending in agriculture. Agricultural production is on track to expand across the majority of the commodities and we forecast output to grow again next season.

After a weak start for investment in agriculture (funds allocated to the sector under the 2015/16 budget decreased), coupled with a crisis in the sector driven by subpar monsoons in 2014 and 2015, and the subsequent rise in debt among farmers, Modi's government has been allocating increasing funds towards the rural economy. The aim is to double farmers' income over 2016-2022. The budget allocated to the sector grew strongly in 2016/17 and 2017/18 and will remain on an uptrend under the new 2018/19 budget.

In this article we look at how successful these reform initiatives have been as Modi approaches the end of his mandate (2014-2019). The table below displays the type of reform the government is currently looking at or may implement in the coming years.

Source: BMI. Note: This is not meant to be an exhaustive list of agricultural policies in place.
Area of policy Policy Description Result
Marketing National Agriculture Market (eNAM) Launched in Q216, this online trading portal for farm is supposed to widen the farmers' universe of buyers and enable farmers to get better prices for their produce. The former state-level system permitted the first sale of crops to take place only in regulated market yards or mandis. Coverage of the e-NAM was slowly expanded in 2016 and 2017 and will be fully implemented by March 2018. As of Q118, adoption is slow so far, as most States have not made yet the necessary amendments to their local marketing regulations (APMC Acts). Farmers would also in theory have to pool their produce via producer organisations or cooperatives to attract distant buyers. There is also a lack internet connectivity in the sector in general as well as of a third party certification for quality monitoring.
Financing & Insurance Farm Insurance - Fasal Bima Yojana This new crop damage insurance scheme was launched in January 2016 and allows for low premiums and faster claim processing. It is supposed to help stabilising farmer incomes and protecting farmers from anomalies of weather, crop damage and market dynamics. The government has been increasing budget allocated to the scheme and aims to cover 50% of the crop in 2018/19, up from 30% in 2016/17.
Credit The government has been willing to improve the farmers' access to institutional credit over recent years. The governmentas policy regarding farmers credit is quite erratic. In years of crisis, authorities often resort to large scale farm loan waivers in order to appease discontent. However, most small farmers still rely heavily on informal sources of credit (commanding higher interest rates) and are therefore left out of credit waivers.
Improvement in farm productivity Soil Health Card Scheme Distribute approximately 14mn soil health cards (SHCs) nationally, in order to address imbalanced application of fertilisers in India, which has been a serious problem hampering yields. An SHC gives information around soil nutrient status for specific parcels, the best dosage of fertilisers to maintain soil health in the long run. Slow progress in the dispatch of the cards.
Potential relaxation of GM use After years of strong government opposition to GM crops, government interest in GM has revived since 2014 with Modi. Field trials were resumed in some states for GM mustard seeds, rice, chickpeas, corn and aubergines. In May 2017, the environment ministry's GEAC, the regulator of GM crops in India, recommended the approval for the commercialisation of a GM mustard developed at Delhi University. However, in October 2017, the Minister referred back the case to the GEAC in light of petitions he had received. As of Q118 the case remains pending. The topic of GM food crops is highly contentious in India and opinions over biotechnology differ widely among the population and especially within Modi's Bharatiya Janata Party (BJP), which is most likely going to impede the commercialisation of GM food crops for now. Lack of clarity surrounding the decision will discourage future investment in GM crops and discredit the government drive towards GM adoption.
Reform of input policy Fertiliser subsidies policy Modi's government has been taking a careful attitude towards the needed changes to India's subsidies policy. Most of the progress has been seen regarding the Direct Benefit Transfer (DBT) scheme for fertilisers, a new subsidy dues settlement system aiming at improving the efficiency of fertiliser distribution and limiting subsidy misuse. Progress around the change in urea prices has also been slow. Low fertiliser prices have helped alleviate the large fertiliser subsidy over recent years. The budget allocated to the Department of Fertilisers has been stagnant over recent years and actual expenditure came in below budgeted amounts over the past two years.
Rural Infrastructure Improvement of irrigation, transport infrastructure The government has been long pledging to improve rural infrastructure and in particular transport and irrigation systems in order to decrease the vulnerability of the crop to monsoon rains. Lingering financial, bureaucratic and logistical hurdles in Indiaas construction sector will continue to cause project delays. This means that growth in Indiaas infrastructure sector will continue to fall below its full potential over the next five years.
Upcoming reforms Development of Contract Farming The government presented in December 2017 a draft of the Model Contract Farming Act 2018. It would allow entry of private players into the sector as it would allow farmers to enter into advance agreements with private entities\buyers (for example agricultural processors). The latter may in turn invest in inputs and skills in the farm. Currently, the draft is under public consultation.

We continue to believe that by implementing reforms with a particular focus on yields and supply chains, India has the potential to overcome lingering under-nutrition problems and to become a large and, more importantly, stable exporter of a large number of commodities. Increasing yields for grains will also allow farmers to diversify their crops and increase production for other, more value-added commodities.

Progress Underway

In terms of individual policies, the government has made progress on several fronts as it introduced a new insurance crop scheme and a reform of the marketing system in 2016, which will help support farmers' income. During the 2018-2019 Budget announcement, the government has also pledged to liberalise agricultural exports and boost them to USD100bn from USD30bn currently by investing in logistics infrastructure, and certification and traceability systems.

However, we note that improving farmers' income will be difficult in light of the complexity of India's agricultural sector and policy making as well as due to the 'leakages' of public funding happening along the supply chain. Many public programmes, such as the increase in MSPs, the expansion of institutional credit in the sector, actually benefit traders or larger-scale farm operations and fail to reach small farmers. Looking at trade, India's goal to expand agricultural exports could conflict with the ongoing rise in import restrictions.

Meanwhile, the government has also failed to initiate some key reforms. For example, it has been pushing back the important reform of fertiliser subsidy policy over recent years, which is a major drag on the country's large fiscal deficit.

Rising Investment To Modernise Agriculture
India - Central Government Budget Allocation For Agriculture (INRbn)
Note: * revised; ** budget. Dept of Agriculture And Cooperation, Dept of Agriculture Research And Education, Dept of Animal Husbandry, Dairying, Fisheries, Dept of Fertilisers, respectively. Source: India's Ministry Of Finance, BMI

Positive Outlook In 2018-2019

Grains: Near to normal monsoon rainfall in 2016 and 2017 will help grain production reach record (wheat) or maintain close-to-record (rice, corn) levels in 2017/18. The outlook is positive across the board for 2018/19, assuming sufficient monsoon rains, as the government announced in February 2018 as part of the 2018-2019 budget that the minimum support price (MSP) for crops shall be 50% higher than farmers' cost of production. Although the announcement is vague as it does not define the level of costs of production, it suggests agricultural prices will remain elevated enough to support plantings in 2018/19.

In spite of elevated wheat output, the trade outlook is not improving due to low stocks and robust consumption growth. India has turned into a net wheat importer in 2016/17 and this will remain the case in 2017/18 and potentially 2018/19.

Strong Growth In 2018
India - Agribusiness Market Value & Select Commodities Production Growth
e/f = estimate/forecast. Source:National sources, BMI

Sugar: The ongoing rebound in production (2017/18), coupled with higher sugar prices earlier this season is boosting the outlook for farmers and mills. We forecast output to rise for a second consecutive year in 2018/19, but lower prices may weigh on mills' profitability recovery.

Dairy and livestock: This sector will continue to expand at a robust pace. The government has been increasing the budget allocated to the 'White' (dairy) and 'Blue' (seafood) Revolutions, which will keep milk output on its expansion path.