Mumbai: Substantial increases in minimum support prices (MSP) on kharif crops and farm loan waiver in Karnataka are expected to reverse the fortunes of the farm sector and bolster continuing rural upliftment focus of the government ahead of the upcoming general elections in 2019.

The optimism is visible in rural sector focused stocks which have fared well in this month. In July so far, BSE Auto index rose 3.6%, the BSE Consumer Discretionary and BSE FMCG indices jumped 1.7% and 1.3%, respectively, while the benchmark index Sensex was up 0.6%.

On 4 July, the government has approved an increase in the MSPs for kharif crops (including cotton) for 2018-19, bringing into effect a proposal made in the Union Budget 2018-19 to fix the MSPs at a level of at least 1.5 times the cost of production. The move is set to benefit the farmers on commencement of harvesting for the ongoing kharif season, from the month of October 2018 onwards.

Economists said that kharif crop income rise as a result of the higher prices but added that it is not enough.

Bank of America-Merrill Lynch said that rains will drive the macro impact of higher-than-expected MSP hikes. According to their estimates, higher MSPs will raise autumn kharif harvest farm income by 10% in contrast to a 4.5% fall last year at 2017’s growth levels, and said that MSP should push up rural demand, especially by raising the income of raw cotton farmers. However, it thinks that it is a good outcome in short-term only. It sees farm loan waivers doubling to $40 billion by the 2019 general elections.

“Artificial price fixation is rarely recommended over time (the government may be forced to impose tariffs, interfere in trade to protect domestic prices if global prices fall, or the rupee appreciates). Non-landed agricultural labour outnumbers cultivators in India. These MSP increases will not directly reach the first set. Even as the government hopes to double farm income by 2022, we believe longer term growth will require migration of population out of agriculture—through continued urbanization," Bank of America-Merrill Lynch said in a note on 5 July.

Emkay Global Financial Services Ltd also feels that rising MSP for uplifting rural economy is a “lagged attempt". “Importantly, it reflects a lagged intervention by the government to ameliorate the farm sector distress arising from declining net realisations, especially in the aftermath of demonetization," it said in a report on 4 July. It added that the average MSP will fall considerably short of the government’s promise of MSP 50% over the comprehensive cost of cultivation. Hence, the promise of doubling the real farm income by 2022 looks difficult but the MSP decision may be a precursor to similar steep MSP hikes ahead of the elections.

However, according to Motilal Oswal Securities Ltd the government’s decision on MSP is sentiment-positive for the rural economy. It said that whether higher MSPs will boost farmers’ income will depend entirely on better reach and higher procurement of various procurement agencies of the Center and the states.

The brokerage firm said that commentaries of rural-focused corporates in sectors like autos, FMCG, NBFC have turned positive post December 2017, and the trends were reaffirmed in Q4FY18 result commentaries as well. “The MSP hikes, coupled with the forecast of a third consecutive year of normal monsoon, augur well for consumption. Also, the after-effects of demonetisation and goods and services tax (GST) are completely behind now, and there are no more macro disruptions on the anvil, which will help strengthen the consumption trends further. More importantly, with several elections scheduled over the coming year and political setbacks faced by the ruling party in the recent by-polls, we expect the government to be supportive of consumption, particularly rural consumption," it said in a note on 6 July.

JM Financial Institutional Securities Ltd also agrees that the MSP for kharif crops for FY19 clearly indicates a step-up in growth rates after subdued growth during the past four years. “Subdued MSP increase had adversely impacted crop profitability and farmer income growth years; the present MSP hikes will likely boost income growth, particularly for the paddy growing farmers given the existing procurement for paddy. We await the details on expansion of procurement for other crops which is essential for the announced price hikes to be effective as a price support," it said in a report on 5 July.