The recent agricultural reforms are being hailed by some as the sector’s 1991 moment. Rules relating to the sale, pricing and storage of farm produce have been relaxed. This is a drastic change from the current tightly controlled sale of agricultural items.

But the stock market, which has been lamenting the lack of reforms, is looking barely enthused. Analysts say while the reforms are positive, effective execution of the laws are a concern. “We believe the new laws liberalize agri trade and are a step in the right direction. If implemented well, we believe it can potentially increase much-needed investment in the agri supply chain," analysts at Jefferies said in a 24 September note.

Another point to note is that even after implementation, it would take some years to yield the desired results. But the stock market likes instant outcomes. Analysts say equity investors usually react to developments that give quick results or provide earnings visibility.

 

“The market’s muted reaction to these developments can be explained as follows: currently, there are no large-cap direct beneficiaries of farm reforms in the listed space. Some listed FMCG companies may benefit from the potential business opportunities, say in the contract-farming space, but the entire ecosystem will have to adapt. Only then can we expect benefits to trickle in on earnings. However, the market could get excited if we see big corporates entering the agri space or say a company like BigBasket decides to list as procurement has been made easier by these reforms," said Amish Shah, India equity strategist, BofA Securities.

“Markets usually have a short-term view, so long-term reforms that don’t translate into immediate earnings growth do not attract the market’s attention," said Ajay Bodke, CEO-PMS, Prabhudas Lilladher Pvt. Ltd.

Besides, the markets are preoccupied with the pace of demand recovery and the second wave of covid infections, apart from concerns about the outcome of the US polls and other factors that have led to a correction in markets globally.

In the case of some other reforms, the markets’ reaction is more immediate. For instance, when the goods and services tax was announced, logistics stocks and companies that were seen as gaining market share from the shift from unorganized to the organized economy had rallied, Bodke points out. Similarly, when changes to the corporate tax were announced last year, the market was quick to respond.

But while the stock market has reacted to the passage of agricultural bills with a yawn, things could change if a large company such as Reliance Industries makes a big move in the space, says analysts.

“Talking about reforms, the agriculture reform could prove to be a game-changer in the long run. It has opened up business opportunities in terms of contract farming and collective leasing of agricultural land, among others. If capitalized properly, they could eventually lead to cost-savings for agri-related companies and can be passed on to the end-consumer. But these will take time to yield results," says Shah.

Private investment in agriculture has been dismal due to marketing and regulatory curbs. According to JM Financial Institutional Securities Ltd, private sector investment in the agriculture sector as a percentage of gross domestic product (GDP) stood at 13.2% in FY18. In the same year, private investments as a percentage of GDP in industry and services sectors were 34.6% and 35.9%, respectively.

Currently, most farmers sell their produce at government-controlled wholesale markets at an assured floor price. The government has said wholesale markets will continue and the minimum support price will not be withdrawn. However, there are concerns that eventually, the system of wholesale markets and assured prices would die down. This will leave small and marginal farmers at the mercy of private companies, economists said.

“Any reform is disruptive in the initial phase, just look at GST. Here, the dismantling of the existing mandi infrastructure will not be an easy process, given the vested interests of some political parties. There is a lot of opposition and protests from many segments; in this scenario, corporates would avoid making huge investments immediately. On paper, this seems to be a game-changer for the agriculture sector, but the execution is challenging. This is a concurrent issue, so now it is up to the states to act upon it," said an economist with a foreign brokerage firm, requesting anonymity.