The much-awaited decision on minimum support price (MSP) was finally made by the government this week. Rural income is likely to get a boost but at a cost of up to 20 bps impact on the fiscal deficit, according to analysts from top brokerages.
The government announced hikes of 4-53 percent in the minimum support prices (MSP) for summer crops. While details on the implementation of the MSP hike are awaited, government intentions are clearly supportive of rural incomes, CLSA said in a note.
The MSP hikes should impact 310-330 mn tonnes of agri production, 25 percent of agriculture’s GDP contribution and 4.5 percent of GDP. In nominal terms, as the MSP gets implemented, the positive impact on the rural income should be Rs 1.2 lakh crore.
The government, as of now, estimates the cost of these hikes at Rs150 bn-300 bn (10-20bp of GDP) but the final number depends on how the MSPs are implemented, highlighted the CLSA note.
The government approved the hike in MSP of all Kharif crops to 1.5x of the cost of production. Consequently, MSP growth ranged from 3.7 percent (for Urad) to 52.5 percent (for Ragi), implying production-weighted average growth of 15.8 percent in FY19 compared to 7.1 percent in FY18.
“This is the fourth highest growth in MSP during the past two decades, with higher growth in FY08, FY09 and FY13, interestingly, all were closer to general elections,” Motilal Oswal said in a note.
“Whether or not higher MSPs boost farmers’ income depends entirely on better reach and higher procurement of various procurement agencies of the center and states. However, it is sentiment-positive for the rural consumption,” it said.
Who would be the key beneficiaries?
Stocks in sectors related to consumption, autos, banks, NBFCs, are likely to benefit the most from the hike in MSP, suggest experts.
CLSA’s favourite rural plays are M&M, ITC, Dabur, Emami and Crompton Consumer. The rural largesse will, however, adversely impact the fiscal deficit (10-20bp) and inflation (30-50bp), raising macro concerns.
Rural consumption is picking up and urban consumption has been doing well too. Sectors like QSR and processed foods and discretionary segments like retail, jewellery, and apparel have shown a good pick-up in consumption already.
“Autos, FMCG, NBFC and select Mid-caps are the natural beneficiaries of rural consumption pick-up, in our view. After the rally in last one year, valuations in the consumption pack are rich,” added the Motilal Oswal note. Key rural beneficiaries from the brokerage firm include names like Maruti, Mahindra & Mahindra, Hindustan Unilever, Britannia, Emami, MMFS, Coromandel.
“However, given the strong earnings visibility, underlying macro triggers and quality management pedigree, we expect them to remain in focus in a volatile broader market environment,” it said.