Commentary & Update

A View From The Ground

Voices from Villages

The challenges facing rural India

Mahatma Gandhi was a great advocate for rural India, once noting that, ‘if the village perishes India will perish too.’

India’s economy has transformed since his death in 1948 –then agriculture was 50% of GDP and now it is 15%. Yet, according to the agricultural census of 2011, 60% of India’s population –and therefore its voter base –is rural and largely reliant on agriculture.

A ‘green revolution’ in the intervening decades saw sharp improvements in yields for rice and wheat. Production kept pace with rapid population growth, banishing major food shortages. More enterprising farmers in some States subsidised fertilizer and government intervention in food procurement contributed to this success.

The cloud to this silver lining is that rising productivity, mechanisation and higher yields have reduced the number of direct jobs provided by farming just as market prices for many crops have dropped below rising costs of production, particularly in tiny land parcels that have been subdivided by inheritance, and are therefore uneconomic. Subsistence farmers, with little or no land of their own, find it increasingly difficult to make ends meet. Resultant debts have even been linked to a tragic and worrying rise in farmers committing suicide.

With the general election imminent, farmers are reminding the government of the major poll promises made in 2013/14. These included a commitment to ensure prices paid for some crops were 50% above production costs and that rural incomes would double by 2022. Like other pledges, the reality of the last five years has not matched up, with some arguing that policies such as demonetisation have actually increased rural stress. Recently farmers have converged in their thousands on Mumbai and Delhi to drive home their disaffection via public protest.

Proving that good politics and sound economics are rare bedfellows, in late 2018 state elections the opposition congress party rode this wave of rural distress to victory by promising to waive farmers’ debt. Consequently incumbent BJP governments (PM Modi’sparty) were expelled in electorally key states including Rajasthan and Madhya Pradesh.

This combination of rising farmer activism and recent Opposition success has focused the mind of the prime minister, whose key focus is May’s general election. The recent budget announced measures to combat rural stress including a federally funded minimum income of circa £60 for some farmers, £20 payable (cash into their bank accounts) before May. India’s Reserve Bank has also announced measures to encourage banks to lend more to landless farmers. As is now clear, agriculture is India’s ‘Sacred Cow’, akin to the UK’s NHS. The challenge for India’s economic managers is to find ways to pay for this populism without destroying the fiscal accounts.

Nevertheless, farming is undergoing structural change of a different sort, as improving dietary habits lead to increased demand for protein and vegetables at the expense of carbs such as maize and wheat. There is a huge opportunity here for farmers to diversify into higher value added crops, and more listed companies taking advantage of this change, including in sub sectors such as dairy products, beverages and processed food. For instance, Operation Floodis a Government scheme started in the 1970s that has transformed India from a milk-deficient nation to the world’s largest producer. This has created attractive investment opportunities for us such as a small cap company called ParagMilk Foods ($260m). It procures 1.3 million litres of milk per day from 200,000 dairy farmers, processing it to produce higher margin products like cheese, yoghurt, ghee, paneer, and whey protein.

This type of specialisation reduces the need for farm labour, and in more developed economies urbanisation has, over a much longer timeframe, taken up the slack as agricultural employment was replaced by jobs in growing towns and cities. In India, the move to towns is well underway but the job growth has not kept up and urban infrastructure, in particular housing and transport, is at breaking point already. Government measures to promote more sustainable urbanisation and encourage low cost housing –also given sops in the recent Budget and aided by a new real estate regulator –are welcome steps in the right direction. This will favour the real estate and mortgage finance sectors particularly those focused on affordable housing. The former has been “off limits” to us as investors for some time, but improving policy and regulation in this area is encouraging us to think again.

While it is impossible to win an election in India without vast swathes of rural votes, India’s agricultural sector requires root and branch change if it is to be properly modernised alongside the rest of the economy. Advanced farming and irrigation techniques have been adopted successfully in some States, which show the potential for companies like Jain Irrigation and PI Industries (both portfolio companies), but deeper reform in areas such as corporate farming, post production and nutritional sufficiency are vital.

So, 70 years on from Gandhi’s death, India has urbanised haphazardly but the rural economy remains critical to the political classes. Whether these recent measures taken will address the growing dissatisfaction of the rural poor, when they vote in the next few months remains to be seen. The challenge for both the Federal and State Governments is to manage the transformation of the food and supply chain effectively, so that the urban engine of economic growth is fed properly by a more dynamic rural sector where even the most marginalised can participate and benefit.