Go Rural, Invest In Rural Sector Stocks, But Wait Till The Monsoon

A highly-speculative budget was tabled by country’s finance minister this February—conditions do apply in the budget document when it comes to achieving the targets, good monsoon is expected, the govt claims. But will it shower money then for investors of stocks related to rural sector? Our RESEARCH TEAM says it here:

Two poor monsoons in a row as well as spells of unseasonal rain have certainly posed a negative ripple effect on the economy while lack of rural demand affected consumption growth, pushed back the long-awaited economic recovery. Also, there is no denying the fact that development of rural areas is slow due to improper provision of infrastructure in comparison to urban areas.

First two annual budgets tabled by the NDA government led by Prime Minister Narendra Modi focused more on capital expenditure instead of required focus on rural development. Since the government has come to power at the Centre, the state of agriculture and the rural economy have dwindled. In 2013-14, 4.7 per cent growth was recorded in agriculture. After the UPA handed over the reins to the NDA, it has grown by merely 1.1 per cent in 2015-16 after -0.2 per cent growth in the last year.

There were alarming reports about acute rural distress and a slump in rural demand after two successive droughts and BJP’s humiliating defeat in the Bihar assembly elections last November, apart from a string of losses in local body polls in various states, including Gujarat – indicates that its hold on the rural voter base has been slipping.

As per the Economic Survey 2016-17 report, “Growth in the agriculture sector in 2015-16 continued to be lower than the average of the last decade, mainly on account of it being the second successive year of lower-than-normal monsoon rains”.

Therefore, the Modi government has tried hard to refurbish its image by placing a renewed focus on the farm sector in union budget 2016-17 by increasing funds for crop insurance and irrigation schemes targeting rural voters. The change in strategy became even more imperative given that assembly elections will take place in states such as Assam, Kerala, West Bengal, Tamil Nadu, Punjab and Uttar Pradesh over the next two years. Most of these states have large rural population, whose main occupation is agriculture.

Focus on rural development and agriculture and a good monsoon in FY17 can alter this entirely. With the focus coming back to rural sector, be it in agriculture, rural development or irrigation, the outlook has turned for the better for the rural-focused firms, including the FMCG companies.

In the budget, the government announced it will stick to its fiscal deficit target of 3.5 per cent for the year 2016-17 which is an extremely important signal that the RBI is likely to go for a 50 basis points rate cut in FY17 and out of this 25 bps cut may be affected in the first bi-monthly monetary policy review meet on April 05, 2016 amid slackening economic recovery.

The overall budget for the agriculture sector was raised from Rs 22,958 crores in 2015-16 to Rs 36,000 crore in 2016-17, a jump of nearly 56 per cent year on a year to year basis (YoY) while raising the agri-credit target to Rs 9 lakh crore for the next fiscal, against the target of Rs 8.5 lakh crore in 2015-16. The budget clearly aims at greater investment in the agriculture and allied sectors and will give a much needed impetus to the farming sector. The government tries to address issues of optimal utilisation of water resources; create new infrastructure for irrigation; conserve soil fertility with balanced use of fertiliser; and provide value addition and connectivity from farm to markets.

Reviving the farm sector was a major challenge for Finance Minister Arun Jaitley as sectoral growth rate of agriculture nosedived to minus 0.2 per cent in 2014-15, from 4.2 per cent in 2013-14. For 2015-16, the growth rate is estimated to be a dismal 1.1 per cent, and is likely to be revised downwards if winter crop yields take a hit.

Agriculture sustains nearly half of all households in India and needs a new paradigm, said the 2015-16 Economic Survey. The survey urged the government to spend on efficient irrigation technologies, support less water intensive crops like pulses and oilseeds, create a national market for farm produce, and revamp the dismal research and extension services.

Aiming to double farmers’ income by 2022, finance minister Arun Jaitely announced a series of measures including higher allocation for Pradhan Mantri Krishi Sinchai Yojna (PMKSY), creation of long-term irrigation fund under NABARD, providing soil health cards to 14 crore farmers and increasing the agri-credit target to Rs 9 lakh crore for the next fiscal.

Some key policy measures announced for the sector in Budget:

-         Allocation for Agriculture and Farmers welfare is Rs 35,984 crore.

-         The ‘Pradhan Mantri Krishi Sinchai Yojana’ has been strengthened and will be implemented in mission mode. Under this scheme 28.5 lakh hectares will be brought under irrigation.

-         Implementation of 89 irrigation projects under AIBP, which are languishing for a long time, this will help to irrigate 80.6 lakh hectares. These projects require Rs 17,000 crore next year and Rs 86,500 crore in the next five years.

-         A dedicated Long Term Irrigation Fund will be created in NABARD with an initial corpus of about Rs 20,000 crore.

-         Programme for sustainable management of ground water resources with an estimated cost of Rs 6,000 crore will be implemented through 3 multilateral funding.

-         2,000 model retail outlets of Fertilizer companies will be provided with soil and seed testing facilities during the next three years.

-         Unified agricultural marketing ePlatform to provide a common e- market platform for wholesale markets.

-         Allocation under Pradhan Mantri Gram Sadak Yojana increased to Rs 19,000 crore.

-         To reduce the burden of loan repayment on farmers, a provision of Rs 15,000 crore has been made in the BE 2016-17 towards interest subvention.

-         Allocation under Prime Minister Fasal Bima Yojana Rs 5,500 crore.

-         To make dairying more remunerative to the farmers, four new projects will be taken up Rs 850 crore has been set aside for four dairying projects - Pashudhan Sanjivani, Nakul Swasthya Patra, E-Pashudhan Haat and National Genomic Centre for indigenous breeds.

Abnish Kumar - Director Amrapali Aadya says, "Massive budgetary allocations for irrigation and rural project have the capacity to restart a U shape recovery. Irrigation will eliminate the dependence on monsoon for agriculture and can change cropping pattern by encouraging farmer to cultivate more economic crop. Further improvement in rural infra can provide better market link."

The outlays on agriculture, rural development and social sectors have been showcased in the Budget as the government’s commitment to farmers and the poor. The fact is that there was a cut in the nominal outlays for agriculture and irrigation in last year’s budget by almost Rs 5,500 crore. Given the widespread agrarian distress, the government has been forced to increase the outlay for agriculture and irrigation from 0.19 per cent of GDP in 2015-16 to 0.32 per cent of GDP in 2016-17, to reverse the damage which we can see below table:

The effectiveness of this budget depends upon the monsoon this year. The good monsoon will give boost to the agricultural sector as this year allocation will help it to grow. On the other hand, if monsoon does not turn out to be good then the whole scenario can change.

Last 115 years of the data we have analysed, there were only four occasion when two consecutive droughts have happened, i.e. 1904–1905, 1965–1966, 1986–1987 and 2014-2015. Also, successive drought years are greater in number than successive flood years on the macro level. Statistical data shown that large-scale monsoon failures are generally not likely to repeat in consecutive three years. So the whole math should work. 

Note: DY – drought years, red underlined years are El Niño years 

“Budgetary allocations towards rural infrastructure development, farmer welfare, minimum support price, agriculture credit, crop insurance, and other such tools will surely provide much needed boost to the rural economy and aid farmers and eventually agricultural growth. We should focus on water conservation by building more dams and better irrigation facilities. We can also address the inconsistent monsoon issue by planting and cultivating crops, which can easily grow in dry conditions or require less water; rather than relying on consistent rainfall.” opines Himanshu Kesaria, Founding Partner of Fine Food Products.

Now we can see the growth potential in the rural segment is high after the government enhancing allocation under various scheme and linking it with asset creation to address the issues of rural and farm distress. Therefore, we believe investors should focus on stocks in sectors that are relatively more levered to rural markets, which will definitely show better signs of earnings growth going forward. Investors can look for rural-related sector like two-wheeler, fast-moving consumer goods (FMCG) and NBFCs that actually cater to low-income housing. There are micro-lending companies which also cater to that segment of the market.