India’s rural economy contributed nearly half of the nation’s overall GDP in 2019–2020. Two-thirds of India’s population participated in its rural economy in the past two years, and agriculture—the largest sub-sector within rural economy, had the highest share of output, contributing approximately 37% of the total rural GDP. The Indian agriculture sector has been growing steadily at a compound annual growth rate (CAGR) of 11% since 2015, supported by government and private sector initiatives towards improvements in its physical and digital infrastructure. It has also witnessed the highest disruption in terms of smartphone and internet penetration. This ecosystem is now at an inflection point, and companies that address inefficiencies across the value chain will have explosive growth potential.
These are among the findings of a report from Bain & Company and Confederation of Indian Industry (CII) titled, ‘Innovation in India’s Rural Economy: Disruptive Business Models are Stimulating Inclusive Growth in Agriculture and Rural Finance’, released today.
The report explains that over the past decade, India’s rural ecosystem has evolved significantly with multiple enablers priming this space for future growth. These trends have created an environment ripe for innovation—allowing start-ups and traditional players to introduce disruptive business models that address inefficiencies particularly in India’s agriculture and finance sectors.
Significant domestic and international investments are being pumped into the sector to improve efficiency and access to credit. Private-equity investments in the agri-tech space have skyrocketed in the last four years, growing at more than 50% per annum to aggregate approximately INR 6.6K Cr till 2020. Investors have focused on opportunities that address systemic issues, building sustainable systems and ensuring inclusive growth. Several global tech giants see this space as a new growth opportunity and are investing in innovative solutions for crop health monitoring and yield estimation.
Parijat Jain, partner and leader of Bain’s Agribusiness practice in India, said, “Disruption in India’s food and agriculture will evolve from traditional agriculture to new farming models, advanced agri-tech services, and new food products. In the last six years, several start-ups have emerged to reduce systemic inefficiencies among inputs and marketplaces, precision farming, processing and storage”.
As newer generations of farmers and FPOs become digitally savvy, new business models are emerging across the agriculture value chain, from inputs and harvesting to processing and distribution. Information and transparency initiatives are addressing existing inefficiencies and formalising a traditionally informal sector.
Tarun Sawhney, Chairman, CII Rural & District Economy Council said “India’s rural economy is poised for future growth enabled by rural digitisation, affordable technological access, financial inclusion initiatives, FPO and FPC community empowerment, improved infrastructure and access, increased investor focus, and a surge of tech startups in the space”.
Accelerated by the pandemic, Unified Payments Interface (UPI) transactions doubled in the past year, processing eight times more transaction value today than credit cards. Multiple other factors have fuelled the swift uptick, including access to smartphones, lower cost of data, and Aadhaar building a digital identity that enabled services like Know Your Customer (KYC) and e-sign. Plus, access to banking facilities have also increased. According to Bain-CII estimates, about 30% of the rural ecosystem is adopting digital payment and digital commerce solutions to avail easier access to agri-financial services.
While cash is still the dominant method of payment for rural financing, accounting for roughly 90% of all payments, digital payments penetration is increasing, driven by government interventions like the Payment Infrastructure Development Fund. Digital-first banking models and lowering of operational costs (which enabled lenders to service lower-value loans) also helped lending organisations scale into the sector.
The rural microfinance sector has grown significantly in the past 18 months too, rising from a gross loan portfolio of about INR 122.5K Cr in December 2019 to INR 146.7K Cr in March 2021. There has been a significant increase in access to credit in the rural ecosystem too. Agri credit has grown at 10% CAGR in the last five years, reaching nearly INR 14 lakh Cr in 2019–2020. About 35% of agri-credit business comes from three states: Tamil Nadu, Andhra Pradesh, and Uttar Pradesh. As lending experience and risk baselining of borrowers mature, there has been an increasing trend of borrowers upgrading to traditional lenders and leaving higher cost microfinance lenders. Access to data has also spurred credit growth because it supports better decision making among fintech players. With digitisation, transaction history is captured, even on small-ticket borrowers, and used to create more robust lending profiles.
Indian agriculture has faced some challenges in the past. However, we are entering a new phase where technology and accurate information can systematically address those challenges to a great extent. The report indicates that this transformation, along with the initiatives listed below, can help radically transform Indian agriculture over the next few years:
Expand FPOs’ participation and role in the rural value chain
Expanding post-harvest infrastructure
Access to robust data sources for real-time data and decision making
Build trust with farmers and make this transformation a cooperative one
March 02, 2022