Published on 7/07/2019 11:14:06 AM | Source: HT Media

What the budget does for stocks of agriculture input providers

Posted in Budget News| #Union Budget #Agriculture #Budget Opinion

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Union budgets are tracked for both annual spends and policy direction. Investors in stocks of agriculture input providers will be somewhat disappointed on both counts. The government's allocation for the distressed farm sector in the FY20 budget was the same as in the interim budget, although given fiscal constraints, hardly anyone was expecting a major increase. Besides, the interim budget had already introduced the minimum income support scheme for certain farm households.

But investors will be more disappointed by the limited strategic direction to boost crop diversification so as to enable farmers to earn more. “Steps related to reinvigorating agricultural extension services that are critical to higher agricultural productivity and educating farmers to adopt better agricultural practices/crop diversification in line with changing food consumption patterns of Indian households were conspicuous by their absence," Sunil Kumar Sinha, principal economist and director, public finance, India Ratings and Research Pvt. Ltd., said in a note.

A challenge for farmers has been excess production of food-grains that tends to depress prices and earnings for farmers. Nudging farmers to diversify crop cultivation, hence, becomes important.

To help farmers realize better prices, the government aims to push for farm-produce organizations and National Agriculture Markets. These budget proposals come following the recent hike in the minimum support prices (MSP) for major crops.

Even so, the government provided limited clarity on how it plans achieve its objectives apart from saying it will “invest widely in agricultural infrastructure." Due to infrastructure constraints, the government’s price-support schemes have restricted influence on the ground. Even in food crops where government schemes have influence, procurement is confined to 29% of production of the last fiscal (excluding pulses).

Further, as a study by JM Financial Institutional Securities Ltd notes, the steep hike in MSPs last year yielded little or no additional benefits to farmers, as the procurement process did not see a material change. In fact, limited government presence and a mismatch in procurement timings mean small farmers who cannot afford storage facilities are selling their produce below the MSP, a JM Financial study found.

Therefore, unless the government builds back-up infrastructure, earnings of farmers and, thereby, of agriculture-input providers (notably agrochemicals, fertilisers) will continue to be determined by traditional variables such as the monsoon and mandi prices.

Unfortunately, the scenario on this front is not encouraging. Monsoon rainfall has been deficient in most of the country, and kharif crop sowing is lagging. Combine this with contained crop prices and the situation is as worrisome as ever.