This week The Economist is running an editorial titled “India’s missing middle”. Based on data analyzing wealth distribution within Indian society, the piece’s central tenet is that the country’s middle class scarcely exists. Not only is its “missing middle” far smaller than that of China, startling inequality is also preventing it from catching up with its wildly successful neighbor, the article argues. Its conclusion: exuberant executives brandishing India as the world’s next consumer growth engine stand to be severely disappointed.
If that is true – and the stack of data backing the article is rather compelling – then it is bad news for agri investors with sights on emerging markets. Marketers and fund managers often present a booming middle class as the main thesis for investing in the developing world: the rising tide created by wealthier consumers, they say, more than compensates for complicated deal sourcing, currency volatility and other risks. If that phenomenon, in India at least, is an illusion, then the whole rationale for investing starts to look a little flimsy.
Or does it? The majority of Indians may not be getting richer as fast as hoped, but many still earn more than they did three decades ago. And if there is one sector that is well-placed to benefit from the improving lot of Indian households, it is probably food and agriculture – one of the first items on which extra income is spent. There are also more Indians to feed: the country’s population is growing at the pace of 15 million people a year. Add to this that eating habits are changing – like elsewhere, Indians are developing a greater taste for proteins, dairy and wheat – and you’ve got impetus for both growth and disruption.
What’s more, the future of Indian agribusiness is not just about the domestic consumer. Rabo Equity, an offshoot of Rabobank based in Delhi, reckons Indian food products are also “better accepted” in international markets, notably Southeast Asia and the Middle East. That provides opportunities for exports. More importantly, perhaps, as it strives to become more productive, Indian agriculture itself is undergoing change. That is creating fresh demand for seeds, inputs and machinery, while also driving demand for speedier and more reliable logistics further down in the value chain.
There are still significant hurdles – explaining why, perhaps, far fewer funds target India than Latin America, despite the subcontinent’s demographic heft. Efforts to make Indian agri more productive are made difficult by the tiny average size of Indian farms (1.16 hectares) – which has been declining since 1970 (from 2.82 hectares) as family holdings are subdivided. Deepak Malik, managing director for India at Proterra, recently told us that the country’s agriculture is hampered by lacking infrastructure and entrepreneurship. Water availability is a problem that could soon get worse; crops are not always planted where they should be.
The net result has been an important focus on Indian agtech – a sector in which the country is playing to its technology strengths – rather than farming and agribusiness per se. But signs are that there is room for this to change. For a start, technology can be applied to solve farming problems: Matrix Partners, an Indian PE firm, in November backed a data analytics start-up focused on “agri-commodities”; a vehicle being raised by Switzerland’s Blue Orchard later invested in ag-focused weather stations.
The sector’s growing need for funding also suggests farmers are willing to invest in improving their prospects. ResponsAbility, another Swiss firm, this month took a stake in a business offering loans to SMEs across the agricultural value chain. Rabo is gearing up to launch a third, bigger fund by the end of the year, for which it hopes to attract institutional investors from North America and Europe. The evolution of Indian farming is core to the vehicle’s investment thesis, Rabo chairman and managing director Rajesh Srivastava told us this week. While Indian ag may be a field better suited to seasoned players, some are not afraid to set themselves ambitious goals.
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