MSP hikes may offer little boost to rural demand

On Wednesday, the government announced minimum support prices (MSP) for all mandated kharif crops for marketing season 2022-23. The MSP of paddy (common) has risen 5.2% from FY22. Yellow soyabean has seen the maximum hike of 8.9%, and bajra the lowest of 4.4% compared to FY22 levels.

According to economists at Kotak Institutional Equities, the aggregate MSP increase is around 5.5% on a production-weighted basis. Clearly, this would have some upward pressure on inflation measured via the wholesale price index (WPI), however, the up move is likely to be modest.

Economists at BoB Capital Markets Ltd note that given a weight of 3.4% in the overall index, the direct impact on WPI inflation can be around 0.20% if all the crops receive the higher price.

Another fallout of this development would be on rural demand, which has been a cause for concern for many companies.

For instance, in its post Q4FY22 earnings conference call, FMCG giant Hindustan Unilever Ltd had said it expects rural recovery to be led by good rabi harvest, normal monsoon, and higher agricultural commodity prices, but one needs to monitor farmer input costs.

For competitor Marico Ltd, rural sales lagged urban in Q4FY22, however, its management expects recovery in the second half of the year led by government initiatives and good monsoon.

Another FMCG company Emami Ltd said that the company witnessed weak rural demand during 4QFY22 and it remained subdued in 1QFY23, as well.

"MSP hikes for the kharif crops were quite subdued on the back of Commission for Agricultural Costs & Prices' estimated cost increases. MSPs’ announcement could be a negative for the market when looking for rural demand boost, added the Kotak report dated 9 June.

While forecast of a normal monsoon in this calendar year does provide some hope, a meaningful improvement in farm profitability and wheat procurement are among the other key monitorables.