By Lutz Goedde, Avinash Goyal, Nitika Nathani, and Chandrika Rajagopalan
Several megatrends may drive the next wave of growth in Indian agriculture. Focusing on a number of investible themes could enhance farmers' incomes and transform their quality of life. India’s determined pursuit of agricultural self-sufficiency since independence has led the country to have a high-growth agriculture sector today. Despite this, India’s farmers are not faring too well and only a third of all agriculture companies posted a profit in recent years. The government’s recent shift in approach, by adopting the goal of doubling farmer incomes, is a welcome attempt to transform the sector. There is scope for agriculture companies and the government to ride emerging megatrends and successfully be a part of this transformation.
The outlook for Indian agriculture and farmers
Minimally dependent on imports, India’s agriculture sector’s GDP stands at an impressive $262 billion. This is due in great measure to the agribusiness companies which have demonstrated higher growth than several other sectors in the last few decades. Growth in the total return to shareholders in agriculture in the last 10 years is 28 percent, an impressive 17 percent higher growth than that earned by the Indian market.
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Around 33 percent of the agriculture companies have generated positive economic profit over 2010 to 2015 (Exhibit 1). These companies have used several strategies to generate value, such as de-risking the business through diversifying geographies, ensuring proximity to customers, and achieving operational excellence to drive profitability.
Exhibit 1
Recent trends are prompting an increasingly urgent question around the sustainability of value creation in the future. The extreme weather volatility, growing food demand, and wide gap in productivity between India and its closest peers, and the need to manage food prices and import pulses to meet demand have all highlighted that India needs to rethink its approach.
In a significant mindset shift, the government’s focus is moving from increasing farm output to improving farmer incomes—it has set an aspiration to double farmers’ incomes by 2022. This will enhance productivity and have multiplied effects on the larger ecosystem.
Boosting farmer incomes in India
Indian farmers face multiple challenges, primary among these are excessive stress on land, water and soil health, lack of knowledge/information about high value/growth products, limited exposure to high productivity practices, weak market linkages, inefficient supply chains with high levels of food wastage, and an acute dependence on rainfall.
Increased farmer incomes will:
foster the use of mechanized techniques to efficiently use stressed resources
increase farmers’ knowledge of the high productivity practices and high value product choices available to them
help farmers to better navigate market inefficiencies rather than settling for lower prices set by the middlemen
To increase farmer incomes, India needs to adopt a higher value mix of farm output, capture greater value through better storage and processing, and make market mechanisms more efficient for farm inputs, financing, and sale of output. Doing this will require all stakeholders to make bold bets by building partnerships, adopting granular crop and micro-market approaches, and developing new business models. We estimate that such measures could unlock roughly $175 billion of agriculture GDP and increase farmers’ income by 85 percent by 2025 (Exhibit 2).
Exhibit 2
Understanding the megatrends
While pursuing the objective of doubling farmer income, it is important to keep an eye on the emerging trends in Indian agriculture. These will continue to shape growth and will lead towards the themes for transforming the sector:
Additional food demand of around 400 million tons by 2025: A four-fold growth of the Indian middle class in the last decade, combined with urbanization and higher GDP, have prompted a higher demand for food. If current trends continue, food demand is likely to grow by over 2.5 percent year-on-year over the next 10 years (Exhibit 3).
Exhibit 3
Shift in consumption toward fruits and vegetables (F&V) and pulses:Unlike the consumption of rice or wheat, which is linearly related to GDP, the consumption of F&V and pulses follows an S-curve relation to GDP (Exhibit 4). Over time, the Indian diet has seen a significant shift to higher protein intake. India is entering a hot zone in this space with projected demand growth at a CAGR of 8 to 11 percent (Exhibit 5).
Exhibit 4
Exhibit 5
Stress on supply due to scarcity of resources: India’s farm resources like land, water, and soil health are hugely stressed. More than half the country faces water stress with withdrawals at 40 to 80 percent of available supply. Similarly, the labor supply is stressed too; India’s labor market is making a natural structural transition from farm to non-farm jobs—agricultural jobs declined by 25 million between 2011 and 2015, while non-farm jobs rose by 33 million. The rising wages for farm labor make it imperative to improve farm productivity through mechanization and other measures.
Scope to improve yield: Indian crop yields are still significantly lower than Asian averages (Exhibit 6). For example, the average rice yield in India is 3.6 ton/hectare compared to 6.7 ton/hectare in China. This could improve by at least 40 to 70 percent with suitable interventions. If productivity does not improve, the country could fail to meet the projected food demand for 2025 and remain dependent on imports of rice, pulses, and F&V. To meet the growing demand for pulses, India will need to import around 13 million to 17 million metric tons of pulses by 2025. India would then constitute a very large percentage of global trade volumes in pulses.
Exhibit 6
Opportunity to cut losses in the food chain: Around 60 percent of food loss and waste in India happens between the field and the end-consumer, and this is concentrated in a few crops (Exhibit 7)—especially F&V and cereals. Several challenges limit cold chain penetration and adoption—high cost of stable power supply, low capacity utilization, and limited financing options. These challenges offer a significant opportunity to improve farmer incomes by addressing the storage and handling of food as well as creating market linkages to customers.
Exhibit 7
Technological disruption reaching farmers directly: Several companies are using technology to disrupt existing models and directly reach farmers. While technology is helping some companies to strengthen their sales force, others are leveraging it to offer agri-advisory services to the farmers. These include providing weather-related information (e.g., Skymet), integrating mandis (e-NAM), offering agronomic advisory services, and connecting farmers directly to consumers (e.g., farmerfriend.in). These innovations will force incumbents to change their business models, and shift the focus to creating value for farmers and increasing their share-of-wallet.
Successful agricultural transformations: Six core elements of planning and delivery
Tapping seven investible opportunities
All these megatrends help to identify seven investable themes for companies. These could create value and boost farmer incomes.
Invest in F&V and pulses value chain to meet demand: These investments could unlock around $15 billion to $20 billion by 2025 and boost farmer income by 35 percent. The value chain of will grow disruptively (Exhibit 8), with demand concentrated in six crops—mango, tomato, potato, pomegranate, onion, and grapes. By 2025, these six crops will account for around 65 percent of the incremental produce value, through a combination of exports and food processing (Exhibit 9). In pulses, the demand will be driven by a need for packaged and branded pulses, fortified pulses, and the market for ready-to-eat snacks, which is growing at 20 percent CAGR.
Exhibit 8
Exhibit 9
Invest in the fast-growing cold chains and cold-storage markets: Despite current challenges, this segment is expected to enjoy significant growth on the back of rising food demand, supply deficits, and improved market economics. The cold chain market is expected to double in size to reach $7 billion to $9 billion by 2020 (Exhibit 10). Cold chain players could invest in alternate energy technologies like solar-powered systems, they can explore chemical treatments to extend the shelf-life of produce, set up pack houses, and reefer transport. They could also optimize the use of existing facilities by opening them up for multiple crops instead of a single crop or product.
Exhibit 10
Establish market linkages between farmers and buyers: This will establish transparency in pricing and better value, especially for perishable products. It could also help to increase farmer incomes by at least 8 to 10 percent. In addition, it will enable the downstream players to source more effectively by eliminating intermediaries. Farmer–producer organizations (FPOs) are already aggregating supply and supporting farmers towards this goal.
Unlock a large opportunity through digital and analytics: Digitization and analytics will play a critical role in building India’s farms of the future (Exhibit 11). Potential disruptions that could unlock value through the food chain are:
precision farming including integrating field data, weather patterns to drive agronomic advice to farmers, and yield forecasting
efficient farm lending with electronic applications, disbursal of loans, insurance payouts linked to weather, field data, Direct Benefits Transfer in agriculture
universal platform integrating farmers and wholesale markets, to provide timely information for price realization
supply chain management
IoT-based advanced analytics in manufacturing plants to improve availability, throughput, and save costs
commercial excellence in micro-markets, pricing and channel management
Exhibit 11
Invest in ecosystem partnerships for disruptive solutions: A slew of startups are playing in one part of India’s agriculture value chain to disrupt prevalent business models. In response, larger players could partner with them or incubate their own new businesses. The effort would ultimately result in innovative solutions for farmers.
Enter the agriculture services market: Rising wages, growing awareness of farm mechanization, and easier credit lending to farmers will all boost the market for a shared farm-economy. There is potential to create a marketplace for equipment rentals. Given the small and scattered land holding patterns in Indian agriculture, the services market is bound to increase in the years to come. Such agriculture services will increase the adoption of farm mechanization, which in turn could increase farmer income by around 5 percent.
Offer agriculture financing and crop insurance to strengthen the ecosystem:
Invest in end-to-end value chains, particularly in F&V and pulses, where demand is expected to grow disruptively.
Provide innovative equipment-financing models to farmers through partnerships with manufacturers, weather forecast agencies, and digital partners.
Offer easy financing for FPOs for community infrastructure for storage and transportation.
Create digital ecosystems for financing and crop insurance.
The government’s pivotal role
The government can continue to support businesses to create value in the agriculture sector. In particular, it could enable the shift towards improving farmer incomes through a focus on six crucial areas:
Modernization of farm production, agriculture input markets, storage, and market access to serve local, national, and export demand
Enable portfolio shift towards high value crops through differentiated value chain strategies
Shift in focus from primary production towards processing and retail
Increase in land and labor productivity in agriculture
Greater private-sector engagement
Concrete projects and well-defined performance indicators to track transformation and collaboration between stakeholders.
An incremental agricultural GDP of around $175 billion could help almost double the farmers’ income in the next seven to eight years (Exhibit 12). This will require all stakeholders to tap emerging opportunities. Understanding current megatrends in this context can help to chart a clear course of action towards achieving these aspirations.
Exhibit 12
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About the author(s)Lutz Goedde is a senior partner in McKinsey’s Denver office, Avinash Goyal and Chandrika Rajagopalan are partners in the Mumbai office, and Nitika Nathani is a consultant in the Delhi office.
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