ASG Analysis: India's COVID-19 Stimulus Brings Overdue Agricultural Sector Reforms

Key Takeaways

  • As part of the Indian government’s COVID-19 relief package, agricultural and allied sectors received relief measures of approximately $20 billion, with significant investments in infrastructure, cluster-based enterprises, fisheries, and animal husbandry.
  • The government also announced key reforms lifting long-standing price and stock controls on agricultural commodities. These long-anticipated reforms are being heralded as a watershed moment for Indian agriculture. Once implemented, the reforms are likely to help farmers get better prices for their products by creating an open market.
  • The reforms will create significant opportunities for the private sector by giving it direct access to farmers’ produce and the ability to control produce quantity and quality. Potential areas for investment include logistics, warehousing, export zones, food processing, and technology solutions for the aggregation of farmers.

Why were agricultural reforms necessary in India?

Agriculture accounts for almost 17 percent of India’s GDP. While the sector’s contribution to the economy has progressively decreased as the economy has shifted towards services and manufacturing, it still employs more than 50 percent of the population. In addition, farmers hold significant sway in Indian politics, and have resisted many market-based reform efforts.While most of India’s economy was opened up in 1991, the pace of reform in the agricultural sector has lagged, and it continues to suffer from over-dependence on seasonal rainfall, lack of capital, limited adoption of automation and modern irrigation methods, and over-regulation of the market. Over the last two years, agricultural and allied sectors have been struggling with a steep decline in output. The growth of the sector dropped from 6.3 percent in 2016-17 to 2.8 percent in 2019-20, and the COVID-19 pandemic plunged the already volatile sector into further distress.

The impetus for the government to initiate agriculture reforms now was two-fold:

  1. Immediate relief from COVID crisis: The COVID-19-induced fall in demand and disruption in global supply chains led to a drop in prices of agricultural commodities (such as perishable vegetables, grain, rice, fruit, and sugar) by 15-20 percent. This was further exacerbated by the nosedive in bulk demand from hotels and restaurants, and the uncertainty over exports. The closure of mandis (local vegetable markets) across most states choked off the only selling platform available to farmers. Allied sectors such as the poultry sector were impacted by rumors surrounding safety of animal products during the pandemic.
  2. Outdated regulatory controls: For several decades, the sector has experienced stunted growth due to strict regulatory controls and a set of regulations that varied state by state. These controls were enacted to ensure continued food supply and discourage hoarding during the 1950-70s when there was a shortage of food and lack of storage capacity. For example, the Essential Commodities Act (1995) allows the government to regulate the production, supply, and distribution of certain commodities, and the Agricultural Produce Market Committee (APMC) Act (2003) limits the sale of farmer produce to designated mandis (local vegetable markets). However, these measures were never modernized, and the arbitrary use of these controls by the central and state governments led to significant supply chain distortions and stunted the sector’s growth.

What do the relief and reform measures include?

As part of India’s special economic package in response to the COVID-19 crisis, the Indian Finance Minister announced 11 measures for the agriculture sector.

Among the announced reforms, the most critical were the governance and administrative reforms, which were officially ratified by the Cabinet on June 3. These include:

  • Removal of price and stock controls (Amendment of the Essential Commodities Act, 1955). This will enable higher prices for produce and make warehousing and storage less risky.
  • Open interstate trade and e-trading of farm produce. This will allow farmers to access markets across the country to get the best price for their produce. It will also allow processers, exporters, and organized retailers to buy directly from farmers and open avenues for online “farm to table” selling through e-NAM and other portals.
  • Contract farming (A new legal framework to enable famers to directly engage with buyers). This will de-risk farmers’ costs, provide both farmers and buyers a strong legal framework to ensure compliance with the contract, and provide private firms with greater control over the quantity and quality of the produce. This is also expected to substantially support India’s food exports, which require strict adherence to global quality standards

The reforms are in line with the long-standing demands of the sector and are reminiscent of India’s broader 1991 market liberalization reforms.

The relief measures also included a Rs. 1 lakh crore ($13 billion) fund to build farm-gate infrastructure (cold-chains & post-harvest infrastructure) and Rs. 10,000 crore ($1.3 billion) for developing Micro Food Enterprises (MFE) through a cluster-based approach. Additional funding was announced for related fields including fishery development, animal husbandry infrastructure, and herbal/medicinal plant cultivation.

The Rs. 1 lakh crore ($13 billion) farm-gate infrastructure fund will bridge the gaps in logistics and warehousing in agricultural supply chains. Alongside innovative new solutions from entrepreneurs and startups, these investments could help reduce much of the fruit and vegetable wastage that occurs along the supply chain. However, it remains to be seen how this fund will be operationalized. While the central government pushed the reforms forward, the state governments will take the lead role in implementation.

Potential Opportunities

ASG sees several immediate opportunities for private sector players in the agricultural sector.

Food processing

Established players in food processing will now be able to directly buy produce from farmers with minimal government intervention. This will allow them to maintain quality across the value chain and increase efficiency by establishing their own end-to-end supply chains. This will create opportunities to expand existing functions or create new product lines.

Development of farm-support infrastructure

With the removal of stocking limits and India’s seasonal harvest-sowing seasons, storage infrastructure will play a key role in resurrecting Indian agriculture. This initiative is particularly important considering the substantial (up to 40 percent) losses in Indian food and vegetable production due to inadequate post-harvest infrastructure. The government’s decision to allot Rs 1 lakh crore ($ 13 billion) to address this will likely create investment opportunities in agri-logistics, cold chain, and warehousing.

Agriculture export zones

With the market for farmer produce opening up and the proposed legal framework for contract farming, large exporters can directly procure produce from farmers or through farmers producer organizations (FPOs). This makes export zones an attractive investment opportunity.

Aggregation of farmers

To ensure widespread market access for both farmers and traders, aggregation of farmers and their produce is key. This will create a demand for technology solutions to sell produce directly to the organized market including large retailers, exporters, and individuals.

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