Former Reserve Bank of India governor Raghuram Rajan wants farm loan waivers banned from election manifestos. While there are good reasons for this, the stock markets are celebrating the prospect of such populist measures in the run-up to the general elections. The ruling Bharatiya Janata Party’s (BJP) loss in the state elections in Chhattisgarh, Madhya Pradesh and Rajasthan should have increased risk premia on account of increased political uncertainty, but any such worries seem to be missing on the Street.
The three states have a large rural population, and political analysts say that the vote against incumbent governments was largely on account of the agrarian crisis. In this backdrop, traders are anticipating rural sops such as farm loan waivers in the run-up to the general elections in 2019. Among others, stocks of consumer companies have risen as a result. Valuations of fast-moving consumer goods (FMCG) companies have become even frothier after last week’s appreciation.
It’s worth noting here that there have been no formal announcements on the rural push, including the much talked about farm loan waivers. “The market’s assumption that a farm loan waiver is on the cards is completely unwarranted," says Sanjeev Prasad, managing director & co-head at Kotak Institutional Equities.
The irony is that talk of farm loan waivers should ideally lead to worries about the fiscal deficit, and lead to a correction in the markets. But this aspect is being ignored and a detached ‘buy rural’ narrative has emerged. The markets want to have their cake and eat it too.
But even if we stay with rural consumption narrative, things aren’t all that rosy. After September quarter results, executives at consumer goods companies said that the pick-up in rural demand was lagging expectations, partly due to patchy monsoons, pointed out analysts at Kotak. “On a two-year basis, aggregate revenue growth stood at 10%, with some divergence between growth for staples (+8%) and discretionary (+12%)," they said in a report dated 22 November. Evidently, the divergence in growth wouldn’t have been as high if rural growth had picked up in line with companies’ earlier expectations.
One of the reasons for the rural distress is low farm incomes. Consumer price index-based retail inflation for November was 2.3%. The ongoing collapse in retail inflation is primarily led by a disinflation in food items. “Subdued food inflation is the root cause of rural distress and is being driven by weakness in international food prices," said Edelweiss Securities Ltd in a note on 12 December.
But improving rural sector fundamentals is a painfully slow process. To improve the farmer’s income, strong government policies and structural reforms need to happen. “A lot of investment has to take place for storage or exports to manage short-term prices and that is not a short-term process," says Kotak’s Prasad.
Increasing minimum support prices (MSPs) for crops can only go so far—reason being a robust and efficient procurement system is not in place. Additionally, the MSP system does not cover several farm produce items such as fruits and vegetables. “In fact, the government’s pricing policies may have worked too well leading to excess supply and subsequently lower realized price for farmers," according to Prasad. One thing the government can do is to directly transfer money to the farmer’s bank accounts linked to the land holding of the farmer, he says, adding, “This will help farmers decide the adequate quantity to produce based on market prices and accordingly, limit any wastage of production."
In a report titled An Economic Strategy for India last week, several economists including Rajan and the International Monetary Fund chief economist Gita Gopinath said, “We need deep-rooted transformation of agriculture, treating it not as a sector that has to be propped up through repeated sops, but as an engine of India’s job creation and growth."
Clearly, the road to rural reforms is not going to be a cakewalk. Investors must take note