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While 2011/12 and 2012/13 are expected to be promising years for the Indian agriculture sector, given better prospects for crops, we are less optimistic about the policy landscape for the industry.
We view India's Food Security Bill as little more than a politically expedient proposal which does not benefit farmers as much as it does politicians. In our view, the bill not only skirts the underlying problems of corruption, ill-equipped distribution systems and poor agricultural productivity, it also will be detrimental to the country's already-precarious fiscal position. We highlight that if the bill is enacted in 2012, domestic procurement of food grains could be kept high, and export momentum could be prevented into 2013.
- Sugar production growth to 2015/16: 42.5% to 34.8mn tonnes. Strong growth will be driven by rising domestic demand, in turn providing production incentives.
- Milk production growth to 2015/16: 22.7% to 143.6mn tonnes. Growth will largely come from increasing domestic consumption of milk, as well as demand for value-added goods such as cheese and butter.
- Palm oil production to 2015/16: 4.0% to 52,000 tonnes. We are sceptical about the government's goal of increasing palm oil production seven-fold by 2015/16.
- 2012 real GDP growth: 7.3% (up from 6.8% in 2011; predicted to average 7.6% from 2012 until 2016).
- 2012 consumer price inflation: 6.6% average (down from 8.7% average in 2011; forecast to average 5.5% from 2011 to 2016).
- 2012 central bank policy rate: 7.75% average (down from 8.5% in 2011)
To date, only 15% of the milk produced in India is processed and packed, with 46% of milk produced in liquid form. Considering the small percentage of milk processed in the country, this leaves a lot of room for adulteration and unhygienic handling and distribution of milk (see 'Almost 70% Of Milk Samples Tainted'). In a bid to boost the packaged dairy products sector, the Indian Dairy Association (IDA) has promoted a tax exemption on dairy equipment and machinery to encourage investments in processing. The IDA has also suggested a 4% VAT for all dairy products, which could help boost consumption.
With the 2011/12 sugar harvest coming to an end, we shift our focus to the 2012/13 crop. We are currently forecasting lower production growth of 4.8% to 27.3mn tonnes but foresee further downside risks to our projection. Indeed, the sector has been experiencing oversupply, lower prices and lower profitability, and an output down cycle typically follows. However, given the government's caution over releasing sugar exports onto world markets and the current level of domestic stocks (the US Department of Agriculture estimates that 2011/12 beginning stocks are 14% higher than in 2010/11), we doubt that there will be a replay of the 2009-2010 situation where the country turned into a net importer of sugar for the first time in years.
Imports of refined palm products in February support our long-held view for increased demand for refined palm oil (olein). The palm oil tax regime change in effect in Indonesia since October 2011 makes importing Indonesian refined palm oil cheaper. According to latest data from the Indian Solvent Extractors' Association, imports of palm olein soared by 238% year-on-year to 304,048 tonnes in February.
Click for Report details:India Agribusiness Report Q3 2012