Rural India’s conundrum

Farm-gate prices are down but demand is showing a small turnaround

Late last month, the Narendra Modi-led National Democratic Alliance government approved a ~110 per quintal increase in the Minimum Support Price (MSP) of wheat and a ~200 per quintal increase in MSP of pulses.

The increase in pulse MSP did not deviate much from the past few year’s trend-line, but the hefty increase in wheat MSP raised many eyebrows.

This was the biggest increase in MSP of this critical crop in the past three years of the Modi government and among the steepest in the past six years.

Depending on which pricing formula economists adopt, the increase in wheat MSP ranged from less than 40 per cent to at least 65 per cent — the first if the C2 (comprehensive cost of production) is considered, the latter if A2+FL principle is adopted.

C2 or comprehensive cost includes all paid out expenses incurred, plus imputed value of unpaid family labour along with rentals and interest foregone on owned land and fixed capital; A2+FL includes all paid-out expenses both in cash and kind along with the derived value of unpaid family labour.

The increase was not an isolated move by the government to staunch the sharp fall in kharif crop prices despite a marginal drop in production. This price fall was mainly on account of a high level of carryover stocks and low demand.

The increase in wheat MSP was followed by a doubling of the import duty on it to 20 per cent, a 50 per cent import duty on peas, followed by a doubling of duties on crude palm oil and a 15 percentage point increase on refined palm oil imports. It also allowed unhindered export of all pulses.

How far all these measures will push up farm-gate prices is an open question because the fault lines run deep.

An assessment by All India Kisan Sangharsh Coordination Committee (AIKSCC) — a conglomeration of over 180 farmers’ organisation — based on price realisations till October suggests farmers stand to lose almost ~36,000 crore from selling seven major kharif cereal and pulses (such as paddy, maize, soybean, groundnut and cotton) because of prices falling below the MSP.

The loss estimates have been calculated by multiplying the projected arrival of these crops in the mandis of major producing states with the difference between the average mandi price and the state-declared MSP. The average mandi price has been calculated from 100 major

mandis for each crop over a period of time. The numbers look staggering, but given that crop prices have been falling over the past few years, there is every reason to believe that agricultural distress is widespread.

Contrast this with the sales of tractors and other major crop inputs in the last few months.

After two not-so-good years, tractor sales are expected to rise 10 to 12 per cent to 650,000 units in 2017-18. Pesticides and plant chemicals sector expects to see a modest 5-6 per cent rise after almost flat sales in 2015-16 and 2016-17.

According to the department of fertilisers website, till August 2017, provisional figures for urea sales in this kharif season were 3.07 per cent more than the corresponding period last year; Diammonium phosphate (DAP) sales jumped 14.25 per cent and Muriate of Potash (MOP) almost 47 per cent.

A recent CARE Ratings report showed that net profit margins of 13 major fertiliser companies jumped almost 26 per cent in the July to September quarter of 2017-18 over the same period last year.

Though, much of this jump in profit margins must have come from falling natural gas prices, which constitutes 55-80 per cent of the manufacturing cost of urea, the most used fertiliser, the report pointed out that good sales seem to have contributed too (maximum fertiliser sales take place only around June-July and October-November).

“The ~15,000-16,000-crore domestic pesticide, herbicide, fungicide and other plant chemicals industry might see a modest 5-6 per cent growth in sales in 2017-18, mainly on account of improvements in the ongoing rabi season,” said Rajesh Agarwal, MD of Insecticides India Ltd, a leading plant protection company.

Farm wages have been better too — as measured by average daily wage rate for general agriculture labourers, they were 7.32 per cent more in July 2017 over the same period last year for men and 8.32 per cent more for women, labour bureau data showed.

According to a recent report, in the July to September quarter, rural sales of FMCG products by both value and volume increased at their fastest pace in over three years at 13 per cent from a year earlier.

Clearly, the rural economy is sending out conflicting signals.

“Tractor sales or two-wheeler sales numbers don’t give any firm indication of rural demand. The overall condition does not show any revival signs as crop prices have plummeted due to an overhang of stocks from last year, and the situation on the ground won’t improve unless the government steps in and starts to buy crops in a big way,” Madan Sabnavis, chief economist CARE Ratings, told Business Standard.

Of course, the massive agri-loan waivers by five states may have something to do with this spurt in demand. It is also well known that the non-agriculture sector contributes more than two-third of the total income in rural areas, but, as Sabnavis points out, the non-farm sector primarily comprises SMEs, which are still struggling from the twin impact of demonetisation last year and GST this year.

Ajay Jakhar, of Bharat Krishak Samaj and chairman of Punjab Farmers’ Commission, says data on tractor sales or improvement in plant chemicals sales needs to be considered at a segregated state level because there could be a variety of one-off reasons and things need to settle down before reaching any final conclusion.

Not everyone is bearish on the rural sector. K Ravichandran, group head (corporate ratings) at ICRA, sees a revival of demand in agriculture inputs like fertilisers, seeds and agro-chemicals for the coming rabi season mainly due to better monsoon, a reduction in channel inventory, and, to some extent, the after effects of the increase in MSP for some crops.

But if the farmer protests around the country are any indication, he is probably in the minority still.