News
26.02.2010
Wanted: a BSE Agro index
The doubling of the BSE Sensex and the NSE Nifty from March lows can be attributed to the absence of agriculture-based components in both indices
Agriculture is the cynosure of all eyes during elections and natural calamities. Barring these two events, urban India pays no attention to farmers, the agriculture sector and the rural economy. In fact, this year’s unprecedented drought in certain parts of the country, as well as floods in other parts, seems to have failed to jolt the rest of the country — stock market indices have posted significant gains in the current year.
The doubling of the Bombay Stock Exchange’s (BSE) Sensex and the National Stock Exchange’s (NSE) Nifty from March lows can be attributed to the absence of agriculture-based components in both indices. While the urban economy seems to have recovered from the effects of the global economic recession, the rural economy has floundered due to the effects of the drought and floods. If stock market indices are supposed to be a barometer of all economic activity in the country, they should reflect this fact.
Instead they continue to do well because all of their components are from urban India, and none from rural Bharat. Despite the listing of numerous agro-based companies such as United Phosphorus, Jain Irrigation Systems, Balrampur Chini and Tata Tea (all highly liquid, with market capitalization exceeding Rs4,500 crore), BSE and NSE somehow do not see merit in adding companies from the agriculture sector—a sector that produces 17% of the country’s output and employs at least 225 million people. Along with the introduction of, say, a BSE Agro index, they should seriously consider rectifying the anomaly in both indices.
Introducing agro-based companies into the stock market, along with an agro index, can benefit the sector in terms of infusing fresh capital and new technology that could alter the dynamics of agriculture. It will also force market participants—both short-term traders and long-term investors— to perform extensive analyses of the sector. This will, then, pressure the government to speed up agro reforms. And the right set of reforms can enable these firms and farmers to spread some of their risks to other related parties, creating linkages between farm produce and markets.
Moreover, this is capable of unleashing market forces in agriculture that can solve the problem the government has been grappling with for decades. Current policies and subsidies are targeted at trying to balance the income of farmers with the price for consumers. And it has failed to deliver on both counts. The recent protest by sugar cane farmers highlights the resentment with government policy. And with food inflation running at close to 20% in the current month, consumers are feeling the pain at the retail level.
Hence, access to capital and technology from markets will enhance the ability of agro-based companies and farmers to introduce productivity-improving methods in agriculture. This could lead to some farmers moving to high-value crops and others into organic farming that have the potential to boost incomes. It could also lead to removing some of the supply-side constraints, thereby keeping a lid on food inflation.
If the Indian economy grows at a pace less than 6%, foreign investors will start pulling money out of the country and there could be a run on the rupee. And for the economy to grow in the 8-9% range, current data indicates the need for higher expenditure from government—something it cannot afford. Putting in place a BSE Agro index that tracks the return on agro-based companies, and adding some of those to the Sensex and Nifty, can provide impetus to the rural economy, which can, in turn, propel India on to a higher growth trajectory.
livemint.com
