BACKGROUND

In his nation-wide address on May 12, 2020, Prime Minister Narendra Modi announced a Rs. 20 lakh crore stimulus package to tackle the impact of coronavirus. In his address, the Prime Minister announced that the Ministry of Finance will be holding a series of press conferences in the coming days to provide details of the package. On May 13, the Ministry of Finance announced the first measures to support the ailing economy, especially Micro, Small and Medium Enterprises and Non-Banking Financial Companies. On May 14, the Government announced the second set of announcements, specifically targeting the economically weaker and ‘base of the pyramid’ sections of the society such as street vendors, migrant workers, farmers, etc. On May 15, the announcements included a number of measures being taken to support the agricultural and agri-allied sector.

DAY #3 ANNOUNCEMENTS: EMPOWERING THE AGRICULTURAL AND AGRI-ALLIED SECTOR

The third tranche of the “Atmanirbhar” package focussed on the agricultural and agri-allied sector. The Finance Minister Nirmala Seetharaman also provided an update on relief measures provided by the Government to the agricultural and agricultural allied activities during the lock-down period. The government had disbursed INR 18,700 crore of funds under PM Kisan Yojana until May 15, 2020 and procured agricultural produce worth INR 74,300 crore at the minimum support price (MSP). While the lockdown led to a 20-25% drop in the demand for milk, the dairy cooperatives procured 560 lakh litres of milk per day as compared to demand 360 lakh litres of milk per day. A total of INR 111 lakh litres of extra milk procurement provided an additional liquidity of INR 4,100 crore to the dairy sector.

These updates correlate well with our learnings from our portfolio companies that microfinance borrowers engaged in the agriculture and allied activities did not face much cashflow disruption during the lockdown and most parties opted out of moratorium to avoid paying extra interest.  The NABARD Financial Inclusion Survey, 2016-17 had reported that agricultural and allied activities comprise 43% of the total household income of agricultural households in rural India.

The announcement comprised 11 measures of which 8 focussed on infrastructure and capacity building and 3 focused on reforms in the agricultural sector. While the measures did not provide immediate relief to the farmers, they laid down enablers to strengthen the agricultural supply chain over the medium to long term. We briefly discuss the points and its medium to long term impact on the sector below:

• Measures announced for strengthening infrastructure & capacity building: Funds allocated for the empowering the sector augur well as it would provide the much needed risk capital required to start and expand micro-businesses in the rural sector. We expect these funds to increase the demand for working capital loans for running micro businesses in the agriculture and allied sectors. Measures to provide market linkages will also improve realizations and debt repayment capabilities.

• Reforms announced in agriculture sector:  Reforms announced in the sector are not only expected to directly benefit the farmer in terms of better realization for his produce but also are also expected to create opportunities to increase access to formal financing. Banks are the primary source of pre-harvest financing in the form of Kisan Credit Card (KCC) loans which are collateralized against farmland. However, penetration of unsecured formal financing is low due to higher uncertainty related to the crop yield which results in farmers taking loans from informal channels.  The proposal to provide legal framework in order to enter into a contract to sell the produce at an assured return will mitigate the price, quantity and quality risk and enable access to unsecured credit to farmers. Further, deregulation of Essential Commodities Act and removing the restriction on selling agricultural produce only to licensees of APMC will create access to post-harvest financing and open market for agricultural supply chain financing to formal financiers, which currently remains largely catered to by informal lenders.