With the rural consumption market likely to triple by 2020 to reach $600 billion from the current level of $190 billion, many PE and VC/ Angel investors are eyeing the rural agriculture space. Writes Dennis Varghese
Capital formation in Indian agriculture has been at a slow pace. Traditionally household savings in rural areas have been invested either in real estate or in gold. In recent times industrial development (mainly SSI) is catching up – as per Reserve Bank of India (RBI) data, credit outstanding to Micro & Small Enterprises under Priority Sector Lending (PSL) stands at 8.4 lakh crore – and the wealth created is expected to move to other productive asset categories.
With the rural consumption market likely to triple by 2020 to reach $600 billion from the current level of $190 billion, many PE and VC/ Angel investors are eyeing the rural agriculture space. Many NBFC’s are focusing on the rural growth and have invested in warehouse receipt financing significantly (most commodity management companies have started captive NBFC’s). These indicate healthy equity infusion in Agri space.
While the above two – debt & equity – can start the engine, a proper tracking mechanism on end use of funds and resultant output on GDP terms through campaigns like ‘Make in India’, Mudra; will actually be the game changer in wealth creation in rural economy.
The fourth and critical component is the credit culture of rural India. With bureau level inputs like CIBIL/ Himark etc impacting credit taking ability in the organized lending side. Awareness of a clean credit history is becoming a norm in most rural areas. The ability of clean customers to attract more credit, and thus progress better economically should help restrict the loan waiver tendencies of rural markets.
A combination of wealth reinvestment in productive assets, credit growth (debt & equity), proper end use tracking, and a good credit culture can catapult the capital formation in Indian agriculture sector.
As per RBI data, of the total credit of Rs 65 lakh crore extended in the country, 1/7th goes to Agriculture and Allied activities (10 lakh crore). Agriculture credit is growing at CAGR of 15% for the last three years. Of this about 65-70% is extended as crop loans – pre harvest credit.
However, as per CRISIL projections average land holding has moved from about 3-4 acres to 2-2.5 acres in the last three decades, further indicating possible downward movement. Fifty-Five percentage of the land owning farmers are either small or marginal farmers (<5 acre holding), and the crop intensity and profitability factors are also on declining, with possible result of sustenance farming and not profitable farming. In addition, there is huge migration to urban areas for unskilled labor.
The need for productivity enhancement through mechanization and group farming (contract farming/ FPO/ FPC’s), has been the mainstay of most of the policies and schemes implemented since 2000, by NABARD/ NDDB, etc. This has resulted in a food surplus position in many of the mass agri commodities in the country, however profitability of the farmer is still work in progress.
Progressive schemes like fair MSP, PMJDY gives hope for a better tomorrow. Similarly, the need for value addition on the crops; including storage, food processing, and packaging etc are critical levers which will enable profitability – schemes like Mudra are very promising and can yield aggressive results if executed well. Marketing of produce and protection of crop through effective insurance schemes are the start and end levers in the value chain, where considerable progress is required; many of which are work in progress (change in insurance claim methodology, emergence of FPC’s) through the various government schemes being implemented.
Tata Capital Ltd is an NBFC founded in 2007, and has been contributing in a small way in the debt side of the story, and has grown exponentially with an Assets Under Management (AUM) of close to 50,000 crore ; with lending operations in corporate, retail, housing, and rural finance.
The rural finance arm, works on one basic theme of ‘Rural Entrepreneurship’ and has been lending since 2010, having funded more than two lakh farmers. Farm Automation business is the lead business which focuses on tractor & harvesters financing, and small commercial vehicles.
Second Strategic Business Unit (SBU) is called Agri & Allied, which focuses on other rural entrepreneur themes like food processing, horticulture, sericulture, trading & manufacturing, warehouse receipt financing, FPO funding among others.
At Tata Capital we believe that the next wave of opportunity is beyond the top cities and hence rural is a focus area. In the times to come we would like to be a significant and responsible partner in the Capital Formation story of Rural Indian Agriculture.
(Author is currently Head – Agri Allied Business at Tata Capital Ltd. Views expressed are personal)