Ind-Ra: Farm Sector Recovery to be Delayed Despite Favourable Monsoon

A complete recovery in farm sector may require more than two favourable monsoons considering the severity of current stress, says India Ratings and Research (Ind-Ra). Nearly 15% of tractor loans disbursed during 2014 and 2015 were overdue for more than three months as of March 2016.

The average delinquency rate for close to 12 months seasoned loans was only 9% during 2009 amid deficient rainfall and low agri-GDP, and still it took nearly two years for the delinquency rate and agriculture output growth rate to completely normalise. Ind-Ra believes that the consecutive monsoon failures have created a much more severe impact on the farm sector and tractor loans now than in 2009 and hence a recovery is likely to be protracted. 47% of subdivisions (as classified by India Metrological Department) faced a deficient monsoon in 2015 compared to 64% in 2009. However, nearly half of these subdivisions have faced two consecutive deficient monsoons by 2015 unlike in 2009.

Ind-Ra believes that just one favourable monsoon may prove quite inadequate to completely restore the farm sector. This is because unlike the 2009 downturn, the current cycle has so far seen almost five years of muted growth in not only production and price but also acreage and crop yields. During the 2009 slowdown, the production of all crops dropped 4% yoy. However, over 25% increase in minimum support price for both food grain and non-food grain crops and nearly 4% drop in key input cost (diesel and fertiliser) lessened farmers' problems. In 2014 and 2015, not only the production suffered but also the growth in minimum support price was low at a CAGR of below 3%. Even after factoring in the reduction in diesel prices in the last two years, farmers' net profit has been growing at a CAGR of below 10% since 2014 and hence impact on farmers' income has been more pronounced.

The woes of the farm sector have also been accentuated by the glut in tractor financing, with tractor loans disbursement in 2015 being 8x of the 2009 loan disbursement volumes. Excess supply of vehicles in a subdued economy has resulted in reduced utilisation rates for tractors. The reduced utilisation rate is clearly borne out by proxy such as growth rate of tractor wages which dropped to 5% in November 2015 from over 15% from 2009-2013.

The declining tractor sales indicated early signs of recovery with growth of 5.70% yoy in March 2016. However, Ind-Ra believes that if sales are pushed without a commensurate improvement in farmers/tractor owners' income, the reduction in delinquency levels would be prolonged. The improvement in delinquency levels came with a long lag of nearly two years in the last cycle - while sales growth rate turned positive in June 2009 itself, the delinquency levels came back to the normal level only in 4Q11.

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