The agriculture sector has always been a major part of the Indian economy. Even today, it employs over 40% of the population. The demand for agricultural products and food grains naturally only goes up with time, with the increasing population, which constantly causes the market to grow and expand. Investment opportunities in agricultural stocks in India hold incredible value potential in the long run, providing ample market entry opportunities for investors.
Recently, government initiatives, including subsidies, welfare schemes, and enhanced infrastructure, have also supported intrinsic growth in the agricultural sector.
In this article, we will provide an overview of the Indian agricultural sector, explain the essential factors to consider before choosing to invest in agri stocks in India and help you determine if investing in agricultural stocks in India is right for you.
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A brief overview of the agricultural sector in India
India's agriculture sector is a prominent global leader and the primary income source for a major chunk of the population. India has the largest buffalo herd and the highest land area for rice, cotton, and wheat cultivation. It also leads in the production of milk, spices, and pulses. Additionally, India ranks second globally in the production of fruits and vegetables, tea, sugarcane, sugar, and farmed fish.
Although the agricultural sector’s GDP contribution has constantly declined over the past three decades due to factors like industrialisation, agriculture has achieved a 4% average CAGR over the past five years. In response to the declining share of agriculture in GDP, the Indian government allocated approximately 1.9% of the 2023-24 Union Budget to the Agriculture and Allied sectors, with 1.3% dedicated to supporting small and marginal farmers through the PM KISAN Yojana. In addition, about 8.3% was dedicated to major subsidies, including petroleum, food, and fertiliser.
Key considerations before investing in agricultural stocks in India
With the agriculture sector in India receiving support from the government, companies in the domain are an attractive avenue for investment. The agriculture sector contains several growth stocks that can provide investors with handsome returns. However, here are some factors you must consider before investing in agri stocks in India:
Supply chain management
The agriculture sector is largely connected and supported by intricate supply chains spanning production, transportation, and distribution. A strong company among agri stocks in India must be able to absorb disruptions in the supply chain and logistics to maintain steady operations.
Technology adoption
The future belongs to tech-enabled companies that leverage technology to increase their efficiency and productivity. Agri companies in India that have adopted technology are more likely to grow in the long term.
Regulations
Changes in government regulations and policies directly influence the agriculture sector in India. This has a direct bearing on a company’s profitability and operations. Staying informed about topics like crop prices, Minimum Support Prices (MSPs), and subsidies is a must if you want to invest in agri stocks in India.
Market trends
Market trends that affect agri stocks in India are not restricted to the country. Even global trends can have an impact on the agriculture sector in India and thus must be closely monitored.
Diversification
Diversifying your portfolio can help you mitigate the risks that arise in specific parts of the agriculture sector and stay on track for long-term gains.
Financial health
Evaluating the financial stability of agriculture companies is crucial. Main indicators like revenue growth, cash flow, debt levels, and profitability provide valuable insights into the growth prospects of agricultural stocks in India.
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Are agricultural stocks in India right for you
Now that you know the several factors you should consider before investing in agricultural stocks in India, let us discuss if investing in agri stocks in India is right for you. Firstly, it is important to be aware of the risks and risk factors associated with investing in agri stocks in India. A major factor that can cause turbulence in the sector is a change in government policy. Such changes can directly impact businesses, causing their products to be less profitable or even outdated.
Besides this, it is very well known that India’s weather is unpredictable. A change in weather patterns or rainfall can be immensely harmful to crops across the country. This may, in turn, affect the demand for fertilisers, storage facilities, and so on, disrupting a major part of the sector. In situations like these, companies in the agriculture sector may generate slim to no profits, face cash flow issues, and lose market share.
Thus, before investing, make sure you understand and account for all these factors.
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Summing up
Investing in agricultural stocks in India presents a promising opportunity, given its crucial role in the Indian economy and the ever-increasing demand for agricultural products. Despite wide-ranging challenges such as changes in government policies and unpredictable weather, the sector's long-term growth potential remains strong. Government initiatives, technological advancements, and robust supply chain management are key factors that strengthen this sector. Investors should thoroughly evaluate these aspects, along with the financial health of companies, before diving into agricultural stocks in India. With careful consideration and strategic planning, investing in agri stocks in India can fetch you substantial returns.
