The white knight of the Indian economy

Post all the turbulence faced in the last couple of years, India seems to be finally on the path of recovery. The IIP growth, core sector growth, rising power consumption, moderating inflation and buoyant earnings growth, all seem to be pointing in one direction – that the Indian economy is at the cusp of a very long and secular growth trajectory and if all things remain constant, this structural trend should easily last for the next decade and more. This will be pivotal to ushering in the US$10trillion GDP era (remember we would be only the third country in the world to achieve this rare feat).

However, if this dream has to be converted into reality then one sector that needs to necessarily fire and on all cylinders) would be the rural economy or the agriculture segment. While agriculture may constitute only ~18-20% of the GDP, it still employs more than 40% of the total population.

Hence, any dramatic yet achievable transformation of the economy seems impossible without the participation of this segment.

One of the key things is that agriculture as an industry tends to have a massive multiplier effect on the economy. The rural population’s behavior seems to have undergone a significant change in the last few years. Consumption, especially in the discretionary segment has been booming through the roof. The Auto industry’s fortunes are linked to Agriculture as it tends to consume a lion’s share of utility vehicles and tractors. Similarly, the pipes, chemicals and fertilizer industries provide the input materials. Warehouses, labour and technology enable seamless processes and finally the money in hand fuels consumption as it is spent largely on FMCG and discretionary consumption products. Thus, if India’s economy is to experience exponential growth, the Agriculture segment will be a key driving factor and will need to fire on all cylinders just like the last couple of years.

Some of the levers for that will be:

Improving farm income

Rising water reservoir levels, improved land irritability, great monsoons for three consecutive years have all contributed to strong momentum in the rural economy. Moreover, it enabled the farm incomes, despite economic headwinds, to register a 9% YoY growth in FY20 and 21. Additionally, revenue mix is diversifying for farmers and main agri now contributes only 37% of overall income mix, thus reducing dependence on farm output.

Improving labour force productivity and crop realization

Higher MSP by the government, which resulted in crop diversification and import reduction, and improving labour productivity will provide further impetus to farm income and the Agri sector. Moreover, increased exports procurement from the government is another positive sign.

Government reforms

Government reforms like Pradhan Mantri Fasal Bima Yojana, Direct Benefit Transfer, APMC Act and PM Kisan Scheme to name a few, will help mitigate losses, provide financial assistance, improve productivity and provide higher in-hand income for farmers.

Agri is undergoing a significant transformation, which is largely being ignored by the markets. Slow as it may be, it remains quite significant. Changes in MSP patterns improved productivity and increased spending on research will ensure a steady growth in the sector leading to the multiplier effect.
We do believe that the wheel has been set in motion for not just the economy but also the stock markets to grow at a steady pace.

However, always remember – invest only in “Good & Clean” companies.

(The writer is the Fund Manager, Ambit Asset Management. Views expressed are personal.)