India: On the cusp of Green Revolution 2.0?
We believe the strong demand witnessed from rural India is structural and sustainable and that its sustainability does not stem from the recently announced legislative changes to APMC / Essential Commodities Act. Of course, neither does it stem from the cash doles by the government to the marginal farmers. We believe it stems from the significant augmentation of water resources by the Government.
Background: Agriculture is a mainstay of the Indian economy with ~60% of its work force employed in the sector. Over years, the dependence of Agriculture on monsoons had declined with increasing irrigation. However, a large part of increased irrigation sourced its water requirements from tube wells, which over time led to depletion of ground water levels.
This presents multiple challenges at the farm level:
- Lower levels of water require the tube wells to be dug deeper at an increased cost.
- More powerful pumps required, entailing higher cost.
- Higher electricity required - be it subsidised power from grid or from captive DG sets which require expensive diesel to run
- It is also believed that water drawn from very deep inside the earth can tend to be saline, rendering it unfit for both human consumption and for agriculture.
- These issues created stress in farmers' financial well being, leading to farmer suicides, lower adoption of modern farming techniques and farm loan waivers.
What has changed?
We believe the above narrative may well be relegated to pages of history, ushering in a second wave of farmer prosperity.
Corporates across the board have been underscoring the robust demand being witnessed in rural areas. Sowing patterns have also been very robust. Naturally, there are questions about sustainability of the same as questions abound whether this growth in sowing area and strong fertiliser sales is due to early onset of monsoon.
We dived into government data to understand and evaluate whether there is a fundamental shift in water availability.
Our first important observation was that ground water table levels have increased substantially between 2018 and 2019. Our analysis across 629 districts show the median ground water level has increased from 8.3 metres to 4.7 metres.
Chart: Median Pre-Monsoon Water Table level across districts of India have seen a sharp increase
Source: National Water Commission, Pareto Capital
We examined areas of policy intervention that could have probably led to such a favourable outcome.
The key intervention that we arrived at was the amendments to the MGNREGA program. While MNREGA program was initiated by UPA as a measure of livelihood support, in 2014, the NDA government brought in an amendment to MGNREGA mandating at least 60% expenditure to be done on agriculture and allied activities. In 2018, 67% of the total allocation was towards water conservation. Subsequently, in 2019, it was mandated that 75% activities directly improve the water security and water conservation efforts. We believe that the improved water levels is a direct result of the strong focus of the government in water conservation. We further note and highlight that along with the increased focus on water conservation, the outlay for MGNREGA was also enhanced by ~30%
The second key policy intervention we stress upon is the Jal Shakti Abhiyaan. To quote NITI Ayog,
"The new government, in 2019, picked up the challenge of water management and conservation by launching Jal Shakti Abhiyaan - a campaign for water conservation and water security in 1592 water stressed blocks in256 districts on 1st July, 2019....
...If implemented well, this program has the capacity to change the overall scenario prevailing in water sector of India".
- Amitabh Kant, 13th August, 2019, NITI Ayog
While we are yet to establish any firm evidence of success of Jal Shakti Abhiyaan, we highlight our finding that between 2019 and 2020, 32 new water reservoirs have been created which have increased the water storage capacity by 5.6% as of now.
Table: 32 new water reservoirs have been added in the last few months
Source: Central Water Mission, Pareto Capital
* Water capacity is in BCM
We believe it is possible that this significant augmentation of water storage capacity is a direct result of the Jal Shakti Abhiyaan / additional MGNREGA focus of the Government of India. We further believe that the strong rural demand could be a reflection of improved economics of the rural sector.
Given so, we believe in a strong likelihood of multiple benefits of improved water levels. The benefits could percolate as higher certainty of income, thereby improving credit worthiness of farmers and farmer's own willingness and ability to invest in modern farming and to increase consumption of better quality / discretionary goods. We believe that the Government, though judicious use of MNREGA and Jal Shakti Abhiyaan, may well be seeding in the second Green Revolution, the multiplier effects of which may be felt across the country for a long time to come.