The sharp hike in minimum support prices (MSPs) last year was expected to lift rural income and revive the agriculture sector. However, the sector has remained in duress, causing the government to now resort to a minimum income support for farmer households through direct cash transfers. But, as with earlier policy interventions, the latest dole-out may also do little to address the core problem.

Despite the government’s support mechanisms, agriculture activity continues to be influenced by weather conditions and farm produce realizations. Deficient northeast monsoon rains and dry conditions mean cultivation so far this rabi season is down 4%. Importantly, government data shows a notable reduction in paddy acreage (down 14%), a large user of agricultural inputs.

Procurement of pulses and oilseeds stood at 6% of production as of mid-February, lower than 9% last year.
Procurement of pulses and oilseeds stood at 6% of production as of mid-February, lower than 9% last year.

Low paddy sowing is weighing on sales of agricultural inputs, points out Edelweiss Securities Ltd. “Our channel checks indicate that consumption has been under pressure due to lower paddy sowing, erratic & untimely monsoon and weak fruit & vegetable prices," analysts at Edelweiss said in a note.

This comes on the back of an already subdued performance in FY19, when deficient rains, weak demand and input cost pressures adversely impacted agrochemical firms’ earnings in the first nine months. An analysis of 21 agrochemical firms’ finances by CARE Ratings Ltd shows pressure on profitability. Net profit margin narrowed 1.6 percentage points to 7.6%.

Unless farm produce prices rise and realizations improve, the expected rural recovery can be elusive. A case in point is the MSP hike in the last crop (kharif) season. For all the hype, the MSP hike has brought limited relief.

Procurement constraints, weak exports and lacklustre global agri-commodity prices rendered the MSP hike ineffective.

“As of mid-Feb '19, only 6% of the FY19 kharif pulses + oilseeds output has been procured, lower than the 9% done last year, and much lower than the expectation of 25% of output to be procured at MSP. The lower MSP based procurement leads to high discount of market prices to MSP (5-30%) for many crops, particularly in pulses," JM Financial Institutional Securities Ltd said in a note. Needless to say, higher MSPs need to be taken with a pinch of salt if procurement at these prices is reducing.

And while cash transfers help, they can provide temporary relief at best.

For a sustainable recovery, the government will still have to pursue reforms in marketing and supply chain. “The broader reforms in the agri-supply chain and agri-marketing, unfortunately takes a back seat in the current focus of income support schemes. We believe unless structural reforms in agriculture are undertaken, farm profitability would remain under stress," add analysts at JM Financial.

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