Rural India has a reason to cheer. According to the government, India is estimated to harvest a record 235.88 million tonnes of food grain in the current crop year. This is 8.1% higher than the previous year’s grain output. The output in 2009-10 stood at 218.11 million tonnes, 16.27 million tonnes lower than the year ago period (read here). If the harvest season ends in June, the higher estimates comes as good news for the government and the economy.
First, the increased output will take substantial pressure off food inflation. Food inflation has been at elevated levels due to supply side constraints. With the estimates projecting a bumper wheat crop in this year, there are expectations that food inflation might ease in the coming months (read here).
Second, higher grain production will give a fillip to the incomes of the agrarian community. Over the years, government has constantly raised Minimum Support Prices (MSP) of key food grains. According to Deutsche Bank strategists Abhay Laijawala and Abhishek Saraf, the MSPs of key food grains, on an average, have seen an annual raise of around 10% from 2004-5 crop year.
Rural income in India is likely to witness a meaningful rise in FY11 driven by the sharper-than anticipated growth in agricultural production coupled with a continuing – albeit modest increase in minimum support prices. Minimum support prices for food grains have risen this year at an average of 5.7%, which though modest is still up yoy. We estimate that the minimum support prices of food grains have now been raised by a CAGR of around 10% since UPA 1 came to power in FY05–which is more than 400 bps higher than the average inflation during the same period.
In fact, the growth in support prices will be higher if one calculates the numbers from 2006-7. The MSPs for all crops have seen a CAGR of 14.2% from 2006-7. For commodities like pulses their MSPs has seen a growth of 20%.
Higher minimum support prices at a time of bumper harvests are expected to cushion farmers from the risk of oversupply driving down the prices. According to Deutsche Bank calculations, the crops under MSP regime alone are expected to bring-in an additional Rs 52,700 crore to the rural economy.
The strategists add:
We estimate that higher agricultural production in FY11 will lead to an additional Rs 527 billion flowing into India’s rural economy solely from those crops which are under MSP regime. Additionally, the government has continued its focus to stimulate rural India by allocating Rs 741 billion to the Ministry of Rural Development in the Union budget. These in turn should, in our view, lead to continuing consumption demand from the rural economy.
Also See | YoY growth in income from crops under MSP regime (PDF)
Even though the government did not raise the support prices substantially in 2010-11, the generous hikes in previous years will come-in handy for the rural community. The incomes from crops under MSPs are expected to witness a jump of 17%, the highest since 2007-8. This should bring good tidings for rural economy.