The Hindu Business Line : Commodities: Time is ripe to invest

Commodities are becoming increasingly critical for fuelling India's economic growth. Last week, we identified six major areas of growth for the country — food; education services; health services; clothing and apparel;

housing; construction and infrastructure; leisure and entertainment.

The current per capita consumption of these goods and services is rather low. With the rise in incomes, there will be greater propensity to consume more and, therefore, greater demand gets created for these goods and services in future.

A substantial part of incremental income will be expended in consuming these goods and services. Demand will continue to rise until a minimum level of consumption is reached; then, it will flatten and, later, decline at higher incomes.

Population growth (1.8 per cent a year), and more important, the demographic profile (currently, 40 per cent of the country's population is less than 30 years old) are going to be important demand drivers. If indigenous output does not meet domestic demand, imports will be resorted to. The signs are visible already.

Expanding trade

Removal of quantitative restrictions on imports and exports has resulted in expanding cross-border trade. Expanding foreign exchange reserves (over $180 billion at last count) provide comfort.

The most interesting feature is, of the six growth sectors, three — food; clothing and apparel; and housing, construction and infrastructure — have a strong commodity bias.

Developments in these sectors will have significant implication for the commodity market. Interestingly, again, energy — a critical commodity — is a common thread across the growth sectors.

India is energy-deficient and its consumption requirement is set to explode. Energy will play a key role in the unfolding growth story.

Given our population's age profile, education, urbanisation, changing food habits and exposure to `western' culture, business volumes in these six growth markets are forecast to rise manifold in the coming years.

Investment opportunities

Tremendous investment opportunities, not visualised until recently, are now emerging.

Food: India is the world's third largest food producer with approximately 600 tonnes of annual output. The country is the world's largest milk producer, second largest in rice, wheat, sugar and horticulture products and third in cotton.

Yet, the country is not much discussed in the world agribusiness circles because of its marginal role in import/export trade. The situation is about to change.

Agriculture and allied activities contribute close to a quarter of India's GDP.

About two-thirds of the population depends on the farm and related activities for livelihood. While manufacturing and services sectors have been demonstrating a robust double-digit growth, agriculture has been a laggard, growing at less than 2 per cent a year.

With output growth of major food products trailing demand growth consistently, supply shortfalls are becoming chronic. With widening supply deficit, the country's import dependence has been rising in recent years.

The situation is unlikely to change anytime soon, especially in the case of pulses, oilseeds and vegetable oils, wheat and some coarse cereals. India is likely to continue to remain a large importer of pulses; will continue to import wheat in modest volumes; and will soon be forced to turn into an importer of maize (corn). The portends are clear.

A successful turnaround

The only success story in the otherwise bleak farm situation is provided by cotton. The output of this natural fibre has been expanding in the last four years, thanks mainly to the favourable conditions, including technology infusion in cultivation. From being an importer of 20-lakh bales cotton until 2001-2002, India today exports 40 lakh bales to the world market. Cotton is a great story of a successful turnaround from a near-hopeless situation. Notwithstanding internal and external challenges faced by the farm sector, there are huge opportunities for investment in farm-related businesses.

The current low level of input usage (seeds, fertilisers, agro-chemicals) offers huge growth potential. Building rural infrastructure, such as silos, warehouses, private markets and cold chains, is another area ripe for investment. E-commerce can deliver efficiency through disintermediation — by shortening the long-existing supply chain. Several multinational corporations have begun to operate out of India and are active in the commodity market.

Some of the well-known names in the global agribusiness — Cargill, Bunge, Louis Dreyfus, Glencore, ConAgra and AWB — are in India to capture market opportunities provided by the growing economy.

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