Discussions in the investor fraternity tend to usually focus on markets, politics and money flow, with a few perfunctory hats doffed to topical issues such as the pollution in Delhi weather or the holiday season. This would, of course, be typical of the community, as a largely self-obsessed fraternity, focussed on the here and now and hence predominantly biased by an urban-centric view of the world. If one must, therefore, redirect your attention, gentle reader, towards a different narrative, one less discussed and far less debated, then one must use subterfuge. That would have to be through the use of an age-old cliché that, India lives in its villages.
With 18mn HHs (representing 45 % of India's workforce) living in rural India hardly anyone would disagree with the economic or political importance of improving their lot. The base of the rural pyramid has low income levels and depends on agriculture, providing labour on the farm and services related to the farm (see Exhibit 1).
Exhibit 1 : Size Matters
Source: Bloomberg Quint, UTI MF
At ₹ 23.72 trillion, GDP from Agriculture was about 17.4% of the country’s GDP. But the share of GDP from agriculture has been falling steadily over the years, once the initial benefits of the Green Revolution were absorbed by the economy (see Exhibit 2).
Exhibit 2: Agri GDP (Gross Domestic Product) Growth & Share in India’s GDP (Gross Domestic Product) – Need for sustained policy support is evident
Source: Spark Capital, GOI, UTI MF
This decrease has hit the bottom of the rural pyramid severely, vulnerable as they are due to the unskilled nature of their abilities and poor levels of education. There are enough anecdotes even of affluent farmers who do not want their sons to follow them into the traditional occupation, due to the poor terms of trade. This only serves to highlight the unhappy predicament of their less fortunate brethren. Data indicates that the economics of the farm has clearly deteriorated, with share of agriculture in rural employment falling over the years. A very recent (Nov-2017) NITI Aayog study highlights some of the severe changes experienced in the rural economy. This may be contrary to the common perception about predominance of agriculture in rural economy. According to the study, as much as two thirds of rural income is now generated in non-agricultural activities. Unfortunately, the impressive growth of non-agricultural sector in the countryside has not brought significant employment gains to the average rural Indian (see Exhibit 3).
Exhibit 3: Falling share of Agriculture in Rural Employment
Source: NITI Aayog, UTI MF
It is a foregone conclusion therefore that employment prospects for a large section of this population can only be achieved by improving the productivity and the economics of the farm. The Prime Minister thus rightly wants to double farmer income by 2022 and ensure gainful employment for this huge workforce. He ostensibly prefers the 'teaching a man to fish to feed him for a lifetime' approach rather than the ' give the man a fish to feed him for a day' approach of his predecessors. There is a holistic and concerted drive by the government apparatus to improve farm yields, by optimising delivery of inputs, enabling better price discovery for farmers and protecting them from risks by way of improved insurance coverage. The efforts are likely therefore to be sustained over many years. Further, the scale of the effort will likely be unprecedented and the effectiveness unparalleled as it uses the JAM trinity (Jan-Dhan-Aadhar-Mobile) to optimise the allocation of government funds and usage of resources. As leakage is addressed, the growth in absolute amounts of government spend in this area may reduce but its effectiveness will presumably go up.
What does this mean for the markets you ask? Well if you have a) a huge population – nearly equivalent to that of the African continent, b) seeing a secular uptick in income over the next many years, the absolute amount of money involved is immense; enough to make corporate India sit up and take note. The surplus from higher farm productivity in the hands of the farmer will invariably be used for consumption in his modest home in terms of conveniences, healthcare, discretionary spend, education, as well as ploughed back as investment into the farm to raise productivity via farm automation/irrigation and quality farm inputs.
Who stands to gain from this? If you look at the farmer's Income statement and Balance sheet (Exhibit 4) it is obvious where the surplus would come from and where it would be spent.
Exhibit 4 : Big Boost to Farm Surplus
Source: UTI MF
Along the same lines, one can easily gauge the sectors which stand to benefit (Exhibit 5).
Exhibit 5: Sectors standing to benefit
Source: UTI MF
India is possibly on the verge of only its second step-change in farm evolution in perhaps two centuries. The first one having been the green revolution which began in the mid-60s and the benefits of which ended somewhere in the 80’s. After almost 5-6 decades, one now sees the beginnings of a second tectonic shift in rural economics. One that is likely to impact the lives of millions and over many years to come. Secondly, market valuations are reasonably in uncharted territory and new ideas have to have something secular and enduring going for them over an extended period rather than merely the earnings trend in the next few quarters.
In conclusion, the stage is set for the advent of very large business opportunities spanning several years and for the attendant investment opportunities they stand to generate. Disclaimer