Like every year the government has hiked minimum support prices to help the farmers realize good returns in early June, but India’s rural growth story is expected to run out of steam because of falling realizations of farmers and limited policy support, according to a recent report by Emkay Global Financial Services Ltd.
Realized prices for the farm sector continue to soften even though the government has raised the minimum support prices (MSP) by over 20% because of rising cost of cultivation and excess supply. The government has raised MSPs for oil seeds, pulses and wheat, but average prices of major crops such as Jowar, Paddy, Tur and Bajra have remained stagnant since December 2009.
According to Emkay Research, the average cost of cultivation rose over 15% while the net cash realizations dipped 10% which led to 35% drop in cash flows in FY12. Emkay estimates cash flows to decline further, by 39% in FY13. Although the government has boasted about the record food grain production of 252 million tonnes in the crop year ending June, around 82 million tonnes of food grain was left to rot in the silos, according to news reports.
The policy response is limited because the storage capacity in India is only around 50 million tonnes which means that 32 million tonnes of food grain was exposed to damage during the crop year 2012. Because of the high mountain of food grain, the government will be forced to sell 8 million tonne of grains at prices below procurement costs. The will increase their procurement price and will further widen the food subsidy bill. Emkay expects food subsidy bill to be 20% higher in FY13, at Rs 90,000 crore compared to Rs 75,000 crore budgeted amount.
There are already early signs of moderation in rural demand. Domestic tractor sales declined 5.1% year-on-year in April and motorcycle sales have dropped 6.5% y-o-y in May. Additionally decontrolled fertilizer sales plunged 14% y-o-y between April to May. State Bank of India’s agriculture non- performing assets jumped 72% in FY12, of which 6.7% were agri-loans.
What are the sectors which are expected to feel the pinch? Emkay said poor cash flows in agri-sector will affect key inputs like complex fertilizers, from auto space - two wheeler, tractor and truck makers will see sluggish growth. Moderating rural demand will also weigh on cement makers, banks that have high exposure to agri-lending and FMCG companies like Colgate and Hindustan Unilever which have a deep rural penetration.