Agri reforms can propel green shoots in economy; drive markets

Farmer groups in India have been protesting against three farm bills introduced in September, with heightened agitations held on the country’s Republic Day. The laws were aimed at bringing in reforms in the agriculture markets and boost farmer incomes.

However, the farmers’ contention has been that the new rules would make it easier for corporations to exploit them and drive prices lower. There have been sit-in protests and stand-offs over the past several months, with the Supreme Court calling for a suspension of the laws and ordering the formation of a committee to mediate and negotiate on the issue.

What do agri reforms mean for the economy and financial markets?

The three bills in question have turned out to be a major bone of contention for farmers and the government simply because of the role that agriculture plays in India’s economy. The sector is the principal source of livelihood for nearly 58 per cent of the country’s population, according to India Brand Equity Foundation (IBEF). The sector’s contribution to the GDP is in the range of 16 to 18 per cent.

In a year ravaged by the coronavirus pandemic, the agri sector has shown resilience. According to industry body FICCI, agriculture and allied activities are forecast to grow by 3.5 per cent in 2020-21, even as India’s GDP is predicted to contract by 8 per cent in FY 2020-21. The report notes that good monsoon, tractor sales growth and rise in rabi crop acreage contribute to this resilience amid the pandemic and other sectors taking a hit.

What were the farm laws about?

The three farm laws include the Farmers’ Produce Trade and Commerce (Promotion and Facilitation – FPTC) Bill, the Farmers (Empowerment and Protection) Agreement of price Assurance and Farm Services (FAPAFS) Bill and the Essential Commodities (Amendment) Bill.

The FPTC aimed at giving farmers greater freedom to sell their produce to buyers directly. It also meant farmers could sell produce through electronic platforms and decide the price, thereby liberating the agriculture sector from middlemen.

The FAPAFS Act was aimed at boosting private investment so as to boost agri income. For private investment to be possible, the investor would need to enter a contract with the farmer guaranteeing a sale of produce at a fixed quantity, quality and price. It allowed investors to provide services such as technology empowerment to boost production.

The Essential Commodities Amendment Act would help create storehouses to store perishable produce and make them available during the offseason when prices go up and maintain an all-year supply of raw materials for factories into processing. This is essentially aimed at facilitating private investments in warehousing and the food processing sector. The Act would ensure regulation of supply of certain food produce under extraordinary conditions only.

The legislations were a step in the direction of the government’s aim of doubling farmers’ income by 2022. According to an analysis by EY researchers (*), the reforms were likely to generate private investment to the tune of Rs one lakh crore and generate jobs for nearly 15-20 lakh people. The IMF too has come out in favour of India’s agri reforms, with its Chief Economist noting that the laws have the potential of increasing farmers’ income while noting that there is a need for a safety net.

Markets favour reforms

The markets, on their part, welcome any reforms that have the potential to boost productivity, generate jobs and incomes. India has not seen a huge private investment in the agriculture sector owing to regulatory limitations historically. According to the 2019-20 Economic Survey, India’s agri exports comprised just 2.15 per cent of the global agricultural trade. The Gross Capital Formation (GCF) in agriculture dropped to 15.2 per cent between 2013 and 2018, the Economic Survey of last year noted. The Gross Value Added (GVA) for agri and allied areas also dropped to 16.5 per cent in 2019-20. Enhanced private participation by way of reforms is likely to boost these values and augur well for the economy.

The markets tend to take a short-term view typically and therefore long-term reforms such as agriculture laws may not necessarily make an immediate impact on the markets. However, the opening up of the sector and the entry of corporates may lift the market sentiments considerably. Even without the agri bills, the government can and has taken steps towards opening up the sector to private investment. This may have a domino effect on other allied fields such as the grocery market, which then gives way for more corporates to enter the supply chain space.

Over the long run, agriculture reforms open up more opportunities for businesses by way of contract farming and empowered technology, leading to savings in costs and boost in productivity.

Also, the Budget 2021 is expected to provide a strong impetus to long-pending agricultural reforms such as enhancing farm gate infrastructure,  forming more farmer producer organisations (FPOs) and strengthening them so small farmers can benefit.

Conclusion

The markets typically benefit from reforms in any sector and more so in a highly regulated space such as agriculture, as it opens the doors for private investments. A Budget aimed at bringing reforms and boosting farmer incomes can drive both the economy and the markets.