Opportunity in India

Credit Suisse Private Fund Group director Connor O’Keeffe and associate Henry Watson explore the trends surrounding Indian agribusiness, in this extract from our new book on investing in agriculture.

Credit Suisse Private Fund Group director Connor O’Keeffe and associate Henry Watson explore the investment trends surrounding Indian agribusiness, including opportunities to organise smallholder farmers, aggregate and build efficiencies in the supply chain, in the new book An Introduction to Agri Investing, published by PEI Media.  

The Indian economy is the third largest in the world in terms of purchasing power parity and this strong growth will continue to close the gap with China and the USA. India’s economic, political and demographic trends mean that agriculture represents an especially ripe opportunity for investment, especially given that India already ranks second worldwide in farm output.

Part of the explanation of India’s stellar GDP growth is bound up with the growth of its working-age population. India is expected to overtake China as the world’s most populous country by 2025, with a population of around 1.5 billion people.

Henry Watson
Henry Watson

Approximately 65 percent of India’s population is less than 35 years old. This provides an enormous engine for economic productivity and growth over the next several decades as the working-age population continues to swell. Additionally, with real average household income growing at a compounded annual growth rate of around five percent over recent years, this large, young population has a growing disposable income, presenting an attractive opportunity for consumer-oriented businesses.

Over the last several decades, India has undergone a series of improvements in its agricultural industry (starting with the Green Revolution from the 1950s to the 1970s), which have transformed the country from a net importer of food into a global agricultural powerhouse that is now a dependable net exporter of food. By 2030, it is forecast that the total consumption of India’s middle class will outstrip that of any other country.

Due to a number of meteorological and geological factors, India is one of the best-placed countries to meet growing domestic and international demand for agricultural production. India has more arable land than any other country in the world, with around 157 million hectares. If production and transport efficiency could be increased across even a portion of this area, a very significant increase in food production could be achieved. Moreover, the diversity of India’s climate across the length and breadth of the country means that a wide variety of profitable foodstuffs can be grown all year round.

As such, India is among the top three global producers of many foodstuffs, including cereals, rice, wheat, pulses, sugar, jute and milk. India has the capacity to meet increasing global demands across a range of agricultural produce, but only if the agricultural sector is able to successfully integrate efficiency-enhancing solutions.

Fortunately, the likelihood that such solutions can be implemented in India is increased by the current political focus on growing and liberalising the agricultural sector. Over the past few years, the Indian government has passed a series of measures focused on securing strong, sustainable growth in agricultural production. Foremost among these measures has been the promotion of a comprehensive food transport and warehousing infrastructure, including cold storages and cold chains, to reduce wastage and increase the shelf life of agricultural produce. Other measures passed have included increased funding for certain irrigation schemes, an improved federal credit offering for Indian farm owners, and a new price stabilisation mechanism for a number of food staples. This support for agriculture was reiterated in the most recent budget in 2016.

Demand for the technological and infrastructural solutions offered by agribusiness companies is expected to soar over the coming decades for two reasons: the significant increase in global demand for agricultural produce; and a stagnation or decline in the total landmass given over to agricultural use.

Given the demonstrated need for and appetite for agribusiness technologies and solutions in the Indian agricultural sector, there are significant opportunities for investors to capitalise on. These may include addressing existing inefficiencies in the sector, introducing technology and mechanisation to increase yields and reduce wastage, and seizing opportunities to export agribusiness solutions.

Despite the success of the Green Revolution in the 1950s to 1970s, India’s agricultural sector today is characterised by comparative inefficiency, due in large part to fragmentation and a lack of modernisation. The average farm size in India is less than three acres (that is 1.5 hectares), which precludes the use of efficient machinery and modern farming methods.

Moreover, the small size of holdings also means that farmers often have insufficient collateral to access meaningful credit, preventing them from investing in their farms or expanding their holdings. The net result is an inefficient sector ready for either consolidation or the provision of agribusiness solutions, that can be profitably taken up by small landholders.

[At the other end of the scale] only 10 percent of Indian produce is processed in India, compared to between 40 percent and 60 percent in other South Asian countries. India could therefore capture more economic value from its agricultural resources through developing a more extensive onshore processing industry.

Between addressing domestic inefficiency and taking advantage of the growth in foreign exports, Indian agribusiness companies have a significant opportunity to grow rapidly, taking advantage of the global demand dynamics for food, and for agribusiness technologies and solutions.

This extract from An Introduction to Agri Investing published by Private Equity International has been edited for posting online.