Strategy: The impossible trinity of farm income - Kotak

The impossible trinity of farm income. The past decade has more or less established the fact that farm incomes in India cannot rise on a sustainable basis without (1) higher inflation and/or (2) periodic government support. Both price-led (likely higher inflation) and volume-led (likely lower farm output prices) growth models are inherently suspect. The only sustainable option is to reduce the number of farm households, which will require other parts of the economy to do significantly better.

Farm income can rise meaningfully only through reduction in the number of farms

In our view, the government's objective of doubling farm income over five years looks extremely challenging without an increase in farm sizes (higher output per farm), or in other words, a reduction in the number of farms. The other two options of higher farm prices or higher farm output simply cannot achieve the desired objective. Doubling of farm income over five years would entail 15% CAGR in farm incomes, which seems challenging based on any combination of underlying prices and volumes. Costs are already quite low with large subsidies on farm inputs, which rule out any additional surplus from lower costs.

Reliance on prices alone will be highly inflationary

FY2007-13 saw large increase in farm incomes led by large increase in minimum support prices. Farm incomes went up significantly over this period. However, this period also saw high inflation as other factors such as rural employment scheme and rapid migration to urban areas resulted in rural labor shortages, which in turn led to steep increase in rural labor wages.

Reliance on volumes can be deflationary at times; negative for farm output prices and income

The recent months have seen a sharp decline in farm output prices on the back of increased farm output. This in turn has resulted in large-scale protests by farmers, which has forced various state governments to announce farm-loan waiver schemes. We note that the recent decline in inflation is largely due to sharp decline in prices of certain food items. The entire food and beverages component of the CPI basket (46% weight) is down 0.2% on a yoy basis (May 2017 data).

The basic problem is that farming in its current form cannot generate decent surplus

The hypothetical income of a typical farm in India. We use the minimum support prices and the costs of various crops as computed by the Commission for Agricultural Costs and Prices (CACP) for this exercise. The small size of Indian farms (1.2 hectares as of 2011 Census) does not result in sufficient output for a decent income for a farm household even if the farm income is supplemented by other income from livestock etc. India needs to find other employment opportunities for the vast majority of its farm households. This is a separate area of discussion and we will revisit the burning issue of employment creation in the near future.

Source : Equity Bulls

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