Agriculture Remains Critical To India's Growth

25 October 2017

Analysts expect India to have years of continued economic success, but future growth will depend on continued agricultural stability. Rice and wheat production should keep pace with demand. India will likely remain the world’s largest cotton producer and the second-largest wheat and rice producer. The country appears solidly on track for decades of growth that will significantly improve the lives of hundreds of millions.

However, this apparent stability conceals a precarious balancing act that can quickly turn nasty. Bad outcomes in either politics or the critical monsoon can disrupt agricultural production and immiserate the roughly half of India’s population who are farmers. We recommend market watchers keep a careful eye on India’s agriculture sector. The calm surface hides unappreciated potential for sudden change that could have global effects.

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A growth story
Policy ruins a good harvest
The potential for volatility
Conclusion

A growth story

At just over 1.3 billion, India’s population famously exhibits diverse habits and tastes. Multinational companies looking to enter this potentially lucrative market have quickly learned that success requires a clear understanding of different diets and religious beliefs. Consumer preferences even vary dramatically from town to town within individual states, meaning that discussion of the “typical Indian consumer” usually doesn’t help. However, India’s strong projected growth means that the effort to tap into this market can justify the high price of admission.

India’s urban and rural populations are getting wealthier and have more disposable income. Monthly per capita consumer expenditure (MPCE) indicates a country’s increasing wealth. Over the 11 years between India’s 1994 and 2005 consumer expenditure reports, the rural MPCE rose only 9 percent while the urban MPCE rose 17 percent. But in only two years between the 2010 and 2012 reports, rural MPCE accelerated, rising 17 percent. This significantly outpaced urban MPCE growth over the same period, which came in at only 13 percent. Urban consumers tend to spend this extra income on luxury items like coffee, tea, and packaged food items. While rural consumers have begun to diversify beyond staples, they still spend most gains on additional rice and wheat.

All of India Begins to See Growth

 

A growing middle class typically consumes more protein in the form of meat, as exemplified by China. That won’t necessarily be the case in India. Hindus represent 80 percent of India’s population and follow a vegetarian or lacto-vegetarian diet. However, not all Indians are vegetarians and meat consumption does occur in certain states across India. Understanding these issues will help food, beverage, and restaurant companies know where to offer fish instead of pork or where banana is preferred to coconut.

Fish and Meat Opportunity in Southern and Eastern India

 

As a top agricultural producer with an increasingly wealthy population and even more room for growth, India inspires bullishness in experts. But recent policy decisions have negatively impacted India’s farmers - close to half of India’s population.

Policy ruins a good harvest

Most of India’s crops rely on monsoon rains. In 2016, after poor monsoons the preceding two years, India had to import just over 6 million tonnes of wheat—the highest total in a decade. Normal monsoon conditions returned in 2016 and led to a record wheat harvest. Wheat imports only dropped to a still-high 3.5 million tonnes as the country looked to replenish depleted stocks. Year-over-year agricultural growth jumped to 5.2 percent.

India’s Wheat Imports Are Under Control

 

What should have been a good year soured after Prime Minister Narendra Modi introduced his notorious cash ban in November 2016. The ban removed approximately 80 percent of all cash from circulation. Farmers could not make purchases they normally would have after the new rule suddenly removed the 500 and 1,000 rupee notes from circulation. As a result, India’s growth rate for the second quarter dropped to 5.7 percent. To make matters worse, a poorly implemented goods and services tax sowed further frustration in farmers looking for relief.

Furthermore, falling farm incomes and food price deflation have also added to the recent woes of farmers. Some states forgave farm loans, but farmer discontent remains high. Widespread protests are scheduled after this year’s kharif (autumn) crop harvest.

Despite the recent pain, farmers have yet to abandon Prime Minister Modi. His Bharatiya Janata Party (BJP) won a record 311 of 403 seats in March in Uttar Pradesh, a farming stronghold and the India’s most populous state. Farmers and others have reserved judgment on the cash ban citing its stated noble intention to end corruption.

Agriculture rebounded in 2017 with record wheat and rice harvests. A massive cotton haul comes as global prices rebound from a multiyear slump. Farmers are likely to earn more as a weak rupee makes Indian exports even more competitive. Of course, they can only take advantage of global markets if the cash ban does not prevent their crops from reaching ports.

A poor sugar harvest and slumping global sugar prices might cause problems for a few southern Indian states. Unlike top sugar producer Uttar Pradesh, they have yet to hold elections this year. Farmer discontent adds a layer of volatility to Prime Minister Modi’s upcoming reelection bid in 2019. Most analysts expect him to win handily, though.

Record Rice and Wheat Crops Are Expected in India this Year

The potential for volatility

India’s supply and demand have plenty of room for volatility. On the supply side, India’s harvest relies heavily on the monsoon. Even a delay of a few weeks could dramatically impact crop yields. India’s rapid growth is moving hundreds of millions of people up the food chain, which means increased protein consumption and diversified demand to satisfy broadening palates.

If India follows a similar path to China regarding demand for high-protein food, the world may struggle to find enough supply. South America’s agricultural boom added much-needed supply when Chinese demand soared. There are no individual countries clearly ready to emerge as global powers to supply India in the way that Brazil did to meet China’s increased protein consumption. Demand in sub Saharan Africa is also expected to rise, which puts further strain on global agriculture.

Of India’s “big four” foods—rice, wheat, sugar, and dairy—volatility in rice production has the most cause for concern. India produces enough rice to be self-sufficient, but there aren’t many alternatives if there’s a long-term disruption in production. There’s a glut of wheat available globally, while the cow’s sacred status makes a disruption in Indian dairy production unlikely.

Indian Rice Volatility Has Significant Global and Domestic Ramifications

Conclusion

Despite perennial concerns about volatility, India can expect stable economic growth. The markets should not be lulled into a false sense of security regarding India’s agricultural future. India’s stable growth will lead to soaring food demand that will require external trade to fulfill. Global producers, suppliers, and everyone in between will benefit from the increased trade.

Continued population growth further strains a careful balance between supply and demand. There’s barely any margin for error when it comes to rice and wheat production. A multiyear period of disruption would send huge shockwaves around the world. Producers will scramble to serve India while other countries with their own food shortages may be shut out.

We recommend using Gro Intelligence as a resource to help to identify early warning signs of potential problems. In particular, timely geospatial data in Gro can help you anticipate official recognition of weather-related events that can affect harvest yields.

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