Experts have mixed opinions about how the market will react on Monday, November 22, to the repeal of the Farm Laws that were passed in Parliament but not implemented due to relentless protests by farmers in key poll-bound states of Punjab and Uttar Pradesh.
Given the relentless protests by farmers over the past one year, Prime Minister Narendra Modi on November 19 announced that the government would repeal the Farm Laws enacted by Parliament in September 2020. Although they were passed in Parliament, the laws were not implemented due to the protests, which were spearheaded by bread-and-basket states of Punjab and Haryana at the Delhi borders. Thus, the repeal of the laws is a big decision, but experts have mixed opinions with respect to the likely market reaction on Monday, November 22.
Since the enactment of these laws, the BSE Sensex rallied 53 percent and the BSE Midcap & Smallcap indices rallied 73 percent and 88 percent, respectively. But the rally was largely driven by the reopening of the economy, easing Covid concerns, improved corporate earnings, and government and RBI measures to revive the economy, besides ample liquidity.
“I think that the repealing of the Farm Laws will be met with a cheer from investors as it would have been difficult to price in the implementation of the laws given the extreme resistance from farmers,” said Sonam Srivastava, Founder of Wright Research.
However, Gaurav Garg, Head of Research at CapitalVia Global Research, believes the market might succumb to some knee-jerk reaction on the downside, but the overall sentiment may remain intact.
“What concerns me more is the relentless selling by FIIs as they sold huge quantities whenever they got an opportunity to sell on any market rise. I believe markets might rather react to global factors around higher inflation, rich valuations and so on, rather than the PM’s announcement,” said Garg.
Foreign institutional investors have net sold nearly Rs 10,000 crore worth of shares in the current month, so far, after selling Rs 25,572 crore in October, which may have been triggered by the start of tapering bond purchases by the Federal Reserve and rising expectations of a rate hike sooner than later.
Ujjawal Kumar, Research Analyst at Green Portfolio, is uncertain about the likely market reaction given that the Farm Laws were not implemented, but he said the repeal is definitely a huge negative for the corporations.
“There is concern about FMCG players positioning themselves to gain from the PLI (production-linked incentive) schemes linked to the Farm Laws, reaping in the benefits of better sourcing,” said Wright Research’s Srivastava. “Leading food & beverages players like Nestle India, PepsiCo, Coca-Cola, Hindustan Unilever, ITC, Marico, and Britannia, among others, might have some exposure.”
Sectors Likely To Be Hit
Industries including logistics, cold chain, agri-related, and farm equipment would be impacted the most because they were supposed to be the direct beneficiaries of these laws, said Kumar of Green Portfolio.
“Logistics companies/cold chain companies, especially those operating in rural geographies, agri-related companies like Adani Wilmar, and farm equipment companies will see a negative impact,” he said.
“We believe rural consumption-led companies might also see some impact,” Kumar said.
Garg agreed, saying agritech startups and organized players that connect farmers to agri-businesses, food processors and exporters, agri warehousing companies, logistics operators and cold storage providers might witness some pressure on Monday since they were among the key beneficiaries.
However, Srivastava believes stocks in the agriculture and fertilizer sector that rely on the current farming ecosystem might cheer the move because the ambiguity has ended.
Benefits and Risks From Farm laws
There were several benefits of the Farm Laws including doing away with intermediaries, giving more pricing power to farmers, and easing sourcing of agri-commodities for manufacturers.
“It would have also helped manufacturers’ plans for boosting food exports from India as envisaged under the PLI (production-linked incentive) for food processing,” said Kumar.
Moreover, by eliminating intermediaries, farmers would have had more say in pricing their produce, leading to overall improvement in rural earnings and consumption, he added.
Wright Research’s Srivastava agreed that the repeal of the laws will negatively impact the government’s plan of India becoming a food exporter over the long term by reducing inefficiency in the local food market.
However, the laws would have meant letting go of the Minimum Support Price promised to farmers by the government, Srivastava noted. “Farmers feared the new rules would lead to inadequate demand for their produce in local markets. They said transporting the produce outside mandis would not be possible because of a lack of resources,” she added.
Are the Upcoming State Elections the Reason Behind the Scrapping of Farm Laws?
Several states including Uttar Pradesh and Punjab will go to polls in 2022. Uttar Pradesh is the most crucial state for any ruling party at the Centre given the maximum Lok Sabha seats.
“Many speculate that the government has repealed these laws as the ruling party was losing ground in polls and meeting resistance ahead of Uttar Pradesh polls next year, home to India’s most extensive farming belt,” said Srivastava.
The process of withdrawing these Farm laws will take place in the winter session of Parliament during November 29-December 23.
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