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Unlocking, reforms spur recovery in agri-trade as food inflation nears double-digit

Unlocking, reforms spur recovery in agri-trade as food inflation nears double-digit

Amid uncertain economic picture, Indian agricultural sector, being viewed by most economist as a sole sweet spot in the Pandemic-hit three-trillion-dollar economy, seems to be rising to the expectations. if the robust recovery since last couple of months is any indication.

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MUMBAI, 14 September 2020: Amid uncertain economic picture, Indian agricultural sector, being viewed by most economist as a sole sweet spot in the Pandemic-hit three-trillion-dollar economy, seems to be rising to the expectations. if the robust recovery since last couple of months is any indication. There are still a lot of disturbances and distortions in the farm commodities market in tandem with varied intensities of the virus outbreak and resultant lockdowns. But the recovery in markets is robust enough to indicate the resilience of the farm sector despite rising virus infections in the rural India.

Data showed that in August the value of derivatives trade in agri commodities has come to above 80 percent of pre-COVID levels to around INR 1,100 crore per day.  While value of trade in spot market is not available, the volume spurt points towards a marked recovery in August from April-June quarter, writes Shrikant Kuwlekar, senior journalist covering commodity spot and derivatives market coverage.

Since March, the pandemic of Corona virus has started taking a huge toll on every sector of the economy across the world with varied intensities. Some economies are finding it difficult to survive due to coexistence of other geopolitical issues while some developing countries, India included, are showing far more robustness as far as economic revival is concerned, though the situation continues to be grim.

When it comes to India, one cannot ignore the agricultural sector as it still contributes 17-18 percent to the GDP, and provides livelihood to around 60 percent of the 1.3 billion people in the country. The migration from cities to rural areas in the early stage of the Pandemic has actually increased the dependency on agriculture by at least 10-15 million people for a good as job losses have shut doors for most of them to return back to cities.

A sudden lockdown towards the last week of March had virtually brought the country to a standstill and the agricultural sector was no exception. Also the sector was the worst hit in early part of the lockdown. Blame it on logistical lacunae or lack of efficient supply chains in most farm commodities except dairy, but lakhs of tonnes of fresh farm produce has rotten in the field until end of April in absence of customers. It was coincidence that harvesting of rabi crops was in full swing just before the lockdown announcement and the activity faced a setback and a resultant crop losses initially, though the situation markedly recovered with a government support in a short time.

As per the Agmarketnet data on some largest consumed commodities, arrivals of wheat surged to 7.3 million tonnes in May from 3.7 million tonnes in April. Supply of mustard has gone up to 400,000 ton and chana to over 300,000 tonnes in May from 256,000 tonnes and 151,000 tonnes in April, respectively. Year-on-year, supply of chana, mustard and wheat has risen by 15 percent, 17 percent and 21 percent in June.

Arrival pattern in APMCs may not be strictly comparable this year due to abnormal situation emanating from the Pandemic. However, the supply in spot markets has dipped in June-August, predominantly on account of seasonal factors of heavy rains that disrupt transportation.

Typically, the lower supply actually supports the uptrend in prices and pushes the trading activity which is reflected on commodity exchanges.   

To summarise, the average daily turnover of the National Commodity and Derivatives Exchange (NCDEX), which had slumped to INR 588 crore in May, from INR 698 crore in the preceding month and a little below INR 1,400 crore in January-February, saw a smart recovery in June-August.

Similarly, the daily volume of agri commodities on the competing exchange Multi Commodity Exchange of India (MCX) also has also recovered, albeit at a slower pace to over INR 300 crore from below INR 200 crore in April. In January, the bourse had grossed around over INR 550 crore of daily turnover in January-February.

While we are in the midst of recovery, the question is whether it is sustainable or not. Experts view the recovery as sustainable and there is space for a decent growth due to improved sentiment in agricultural markets after the sector emerged as a clear winner during pandemic situation.

Announcement of three ordinances in early June, now viewed as the path-breaking agricultural reforms since independence, seems to be helping the sector with a new lease of life as fresh flow investments lines up in the agricultural and allied sector infrastructure.

What is driving a growth in agri markets currently is an amendment to the Essential Commodities Act, which, barring some exceptional circumstances, scraps the stock limits in key farm goods such as pulses, oilseeds, edible oil to ensure better prices for farmers.

The amendment is the first among three big reforms mentioned above and has encouraged the stockists to come back to markets with a confidence after years of pause. Additionally, government impetus on farm sector by announcing a trillion-rupee stimulus for the farm infrastructure will further streamline the sustained activity in the sector.

The recovery, however, coincides with a sharp spike in retail food inflation, which is almost at two-digits and seen rising further. The three-month old Agridex, India's first tradable commodity index owned by NCDEX, has perfectly gauged the inflationary trend by rising nearly 16 percent in this period. But there are host of factors.

Lower activity in April-Jun in fruits and vegetables segment, continued vacuum in supply chains in some pockets, expectations of heavy losses to kharif crops due to incessant rains in many parts of the country, and last, but not the least, fear-premium in prices as consumers shift to e-commerce platforms to avoid infections potentially in the physical markets.

Unlocking of economy is in 4th stage now and at this pace economic activity is expected to normalize by end of this calendar if not by Diwali. However, inflation may start easing from end of this month as new crops from kharif and fruits & vegetables hit markets due to opening of transport sector to the pre-pandemic level.

What needs to be watched now is that a rapid spread of Pandemic in rural areas in recent times doesn't stall the momentum of economic recovery. 

By Shrikant Kuwalekar

Senior journalist and with over 15 years of experience in commodity spot and derivatives market coverage. His contribution in sectors from bullion and energy to pulses, spices and edible oil segment has repeatedly been acknowledged by key stakeholders in agri and non-agri ecosystem. 

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