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What hikes in MSP mean for the economy and politics.

Date: 08-06-2023
Subject: What hikes in MSP mean for the economy and politics
The hikes up to 10% in Minimum Support Price (MSP) for several Kharif crops for marketing season 2023-24 by the Union Cabinet today have come just in time. The MSP of common grade variety of paddy has been increased by Rs 143 to Rs 2,183 per quintal. Highest increase in MSP was in moong by 10.4 per cent at Rs 8,558 per quintal.

The move is to ensure remunerative prices to farmers for their produce and to encourage crop diversification, said Union minister Piyush Goyal. The increase in MSP is in line with the Union Budget 2018-19 announcement of fixing the MSP at a level of at least 1.5 times of the All-India Weighted Average Cost of Production, aiming at reasonably fair remuneration for the farmers, according to the government.

The expected margin to farmers over their cost of production are estimated to be highest in case of bajra (82%) followed by tur (58%), soybean (52%) and urad (51%). For rest of the crops, margin to farmers over their cost of production is estimated to be at least 50%

The hikes bode well for nascent demand recovery in rural areas. Rural inflation was higher than urban inflation in FY23, the first time in six years. While the average inflation in FY23 was 6.7%, prices in rural areas increased 6.8% from a year earlier. High inflation had depressed demand in rural areas, impacting several industrial sectors with high exposure to rural markets.

Two-wheeler retail sales, a proxy for rural demand, in FY23 fell to a seven-year low and tractors saw the slowest growth pace among all segments, reflecting inflation’s adverse impacts on rural India. Though the two-wheeler segment saw growth on an annual basis, it continued to remain significantly below pre-pandemic levels.

The two-wheeler category witnessed a growth of 12% YoY but was down by 9% from its pre-pandemic levels. Rural India, which still has not performed, continues to remain under inflationary pressure, said Manish Raj Singhania, the president of the Federation of Automobile Dealers Associations.

However, two-wheelers sales rose for a second quarter in a row in the March quarter, indicating a turnaround in consumer sentiment in rural markets where demand has been under pressure the last couple of years. These sales have risen for two consecutive quarters only twice since the outbreak of the pandemic, but the first one was more due to base effect as sales in the year-earlier period were low due to Covid-releated disruptions.

Two independent research studies have found that a spending weakness has resulted in slowdown in smartphone sales in rural areas. The rural share was growing till mid-2021 before stagnating at 35-40% of total sales.

The FMCG sector has been facing pressure over the past few quarters due to weak rural demand, among other factors. The recovery in the rural sector (which forms nearly 40% of the FMCG sector volumes) is the key factor that could change the sector’s prospects. Rural consumption was sluggish in the past few quarters but has seen a positive consumption growth of 0.3% in the March 2023 quarter, the first time after six quarters, according to Nielsen’s recent quarterly snapshot. The CPI Inflation has ..

Different industry segments such as FMCG goods and two-wheelers and tractors have pinned their hopes on recovery in rural demand of which green shoots are already visible. The RBI has said in its monthly bulletin that India's growth in the April-June quarter is likely to be driven primarily by private consumption, supported by reviving rural demand on the back of the encouraging developments in both the kharif marketing season of 2022-23 and the Rabi marketing season of 2023-24,

The latest hikes in MSP for Kharif crops will boost the nascent growth in rural demand by putting more money in the hands of farmers, thus improving consumption.

The MSP hikes also come before Assembly elections in several states, especially agricultural states Madhya Pradesh, Rajasthan and Chhattisgarh, later this year, for which political parties have already got in campaign mode.

Higher prices to farmers for their produce are going to help the electoral prospects of the Bharatiya Janata Party (BJP) when the Congress is relying on freebies to win votes. The MSP hikes matter particularly for Madhya Pradesh where the BJP is the incumbent and faces an aggressive Congress.

Source Name:Economic Times

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