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Will the hikes in MSP of agri products affect stocks?

Author: Kumar Shankar Roy & Veeresh Hiremath /Wednesday, July 11, 2018/Categories: Agri & Fertiliser

Will the hikes in MSP of agri products affect stocks?

In keeping with the promise to implement the MS Swaminathan formula made in the election manifesto, the BJP-led government has been increasing the minimum support price (MSP) for major crops for the last five years.

Higher MSP may not contribute to rise in income level of the farmers unless they realize higher prices for their produce in the market during the off-season. However, it may support farmer’s income by limiting their losses. A hike in MSP is also done to attract farmers to increase their acreage under cultivation of essential crops.

In the first budget of the current NDA government, the Centre aimed at doubling farmers’ income by 2022. In this regard, a series of measures were taken through various schemes. In Budget 2018-19, the Union finance minister proposed to fix the minimum support price at 1.5 times of the cost of production. As proposed, the Cabinet Committee on Economic Affairs on July 4 approved higher MSP for 14 notified kharif crops for 2018-19 -- profit over the input cost for most crops including paddy to be over 50 per cent.

At a broad level, this is the highest hike since FY13 and is said to be above street estimates of a 13-14 per cent increase. 









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But MSP hikes have different ramifications when you consider the situation. Investors have a lot riding on agriculture-related companies and rural consumption. The hikes for the ongoing summer crops (kharif) in that marks, some would say, lagged attempt to reverse the faltering farm sector fortunes. This should support the rural investment theme and boost the two-wheeler auto stocks and cement shares. 

For one, the exact impact of these increases on farm income is difficult to project. This is for a simple reason - there is not enough data to know the volumes of production that these new prices will apply to. Still, there are two very clear effects. Firstly, the MSP hike will certainly augment rural and farm incomes at the cost of some fiscal pressure for government finances. Two, the rural piece of the economy will be supported. We have all read about the hue and cry for farm loan waivers. The actual increase in farmer’s realisation depends on the price at which he is able to sell the produce in the market. In that sense, the MSPs act as a floor to prices mainly in times of shortage of production. Also, the activity would depend on the government’s decision to procure the produce.

From a stock market point of view, rural stocks have got a sentiment booster, at best. Estimates suggest that Kharif incomes could rise by 8-10 per cent as a result of the higher prices. If this happens, stocks of large FMCG companies with rural distribution muscle, two-wheeler companies, electrical firms and pure-play agri-oriented businesses like tractors, seeds and fertilizers should benefit. There is a big 'IF' in this theory because higher MSPs do not necessarily mean higher disposable income for the farmer. 

However, equity investors should take heart from the fact that the government’s moves to lift the rural economy could benefit companies. MSP is just one move. Uplifting of the rural economy can happen not by just boosting farm incomes. They can include higher rural sector budget allocations such as MNREGA, rural housing and infrastructure. Farm loan waivers are a political hot-potato, but they make a lot of sense because they lift sentiment. That apart, direct benefit transfer, power for all, aggressive foodgrain procurement and import restrictions can form a 360-degree campaign to nurse the rural economy and rural consumption back to the pink of health. 

The one area equity investors should look with caution is price-rise. MSP hikes can lead to some inflation, forcing the government to use the interest-rate as a punitive measure. While the inflationary impact has been contained to some extent because of the fact that the MSP of paddy, which enjoys the highest weight in CPI inflation, is about 13 per cent, nobody is ruling inflation. Expect the increase in MSP to push up CPI inflation by about 50-75 basis points. The good thing is that the full impact of all this is likely to come in the second half of this financial year. Already, equity investors expect one more rate hike by the RBI in this financial year or early part of next year. So, it is important to track the ongoing impact of MSP and whether it causes inflation to surge. 

Lastly, the MSP hikes will mean little without adequate rain. For this, there is a need for greater clarity on rains in the critical sowing month of July. You can relax that the Met has forecast July rains at a high 101 per cent of normal, but actual sowing data is what will convey the success of higher MSPs or not. 

Kumar Shankar Roy is a financial journalist with over 13 years of experience and Veeresh Hiremath is the DGM of Karvy Comtrade Limited

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rajyashree guha

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1 comments on article "Will the hikes in MSP of agri products affect stocks?"

neeladriraju K

7/15/2018 5:33 PM

i fully agree with analysis but a rider the implementation of this MSP policy.the major problem is markets versus public int ervention ,nodou t the procurement of wheat and paddy by govt helped the farmersof these corps. but at what cost? FCI became white elephant .we have so many commodity boards which do not come to rescue at the time of distress sales.the price gap between producer and consumer is widening.

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