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Business News/ Markets / Stock Markets/  Farmers' protests and impact on Indian stock market - explained

Farmers' protests and impact on Indian stock market - explained

The primary objective of the 2020 Farm Act was to empower farmers to freely sell their produce in any market, moving beyond the confines of local Mandis.

Farmers protest (REUTERS)Premium
Farmers protest (REUTERS)

Farmers have once again taken to the streets, echoing protests reminiscent of those three years ago. In 2021, the government was compelled to retract newly enacted agricultural policies. The primary objective of the 2020 Farm Act was to empower farmers to freely sell their produce in any market, moving beyond the confines of local Mandis. This was also expected to improve the Agri supply chain in India and develop the sector with the introduction of private players. Today again, farmers are once again spearheading protests, seeking further freebies from the government under the belief of their victory in 2021.

So far, the ongoing agitation has not impacted the stock market, even as it unfolds on the brink of a National Election. This may be because the prices of foodgrains are still stable and no effect on supply and demand has been noticed to date, other than some hiccups reported in NCR. Further, the market has a belief that the government is unlikely to accept the excessive demands as it could have a dire effect on the fiscal. 

A significant demand put forth by the farmers is the increase in Minimum Support Price (MSP) and a pledge to extend the scheme to cover all crops. While the government's MSP-based procurement is largely concentrated on rice and wheat, the scheme technically encompasses 23 crops. The farmers are demanding the implementation of Dr Swaminathan Commission’s MSP, 50% above A2+FL+C2 formulae. Current method is 50% above A2+FL (A2: actual Agri input costs, FL: imputed value of family labour).

The existing formula sets the Minimum Support Price (MSP) at 50% above the all-India weighted average cost of production. A2 includes expenses paid in cash and kind for items such as seeds, fertilizers, pesticides, hired labour, fuel, lease, interest on working capital, irrigation, etc., while FL accounts for the value of unpaid family labour. In essence, the MSP cost will encompass the actual expenses on inputs, labour, and the imputed value of unpaid family labour.

From an accounting standpoint, the cost of an asset (interest and depreciation) is considered below the belt of the operating margin. And the cost of equity is not accounted for. If C2 is considered, it will lead to a plus 50% profit after tax margin, a parameter no manufacturing & services company in India can even dream-off. It's worth noting that agriculture is exempt from taxes. Forecasts suggest that incorporating these factors could potentially lead to an increase in the prices of foodgrains in a range of 10% to 30%.

Another factor to affect the fiscal is the demand to increase the MGNREGA wage to Rs.700 from an average of Rs.300 in states like Haryana, Punjab, and UP. There is also a call to extend the fixed period to 200 days from the existing 100 days. The government has allocated Rs.86,000 cr. in the 2025 interim budget, meeting this demand would escalate the budget to Rs. 4.5 lakh crore. Some other demands are to exit out of the WTO agreement (even though that is positive for the farmer), Loan Waivers, and monthly Rs. 10,000 pensions to farmers above the age of 60.

The agitation is mostly from the Punjab & Haryana regions, which hugely benefited from the green renovation programmes, especially wheat and rice. However, as India has evolved towards self-reliance, the perks associated with these programs have dwindled. Concurrently, the cost of production and living standards have escalated, while the net gains from crop sales have contracted due to increased supply in India.

Hopefully, a middle ground can be reached between the Government and farmers associations of Punjab, Haryana, and North UP. The overarching objective should be to diversify into other categories of food grains (which requires much lower water necessity compared to Rice & Wheat), backed by a guaranteed MSP.

The author, Vinod Nair is the Head of Research at Geojit Financial Services.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 25 Feb 2024, 02:05 PM IST
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