On Wednesday, the government announced the Minimum Support Price (MSP) for all mandatory kharif crops for the marketing season 2022-23. The MSP (General) of paddy has increased by 5.2% from FY22. Compared to FY22 level, yellow soybean has seen the maximum growth of 8.9% and bajra the lowest at 4.4%.
According to economists at Kotak Institutional Equities, the overall MSP growth on a production-weighted basis is around 5.5%. Obviously, this will put some upward pressure on inflation as measured through the Wholesale Price Index (WPI), however, the chances of an upward move are slight.
Economists at BoB Capital Markets Ltd note that given a weighting of 3.4% in the overall index, if all crops receive higher prices, the direct impact on WPI inflation could be around 0.20%.
Another fallout of this growth will be on rural demand, which has been a concern for many companies.
For example, in its post Q4FY22 earnings conference call, FMCG giant Hindustan Unilever Ltd had said that it expects Rural recovery will be done by good Rabi crop, Normal monsoon, and high agricultural commodity prices, but farmers need to keep an eye on input costs.
For competitor Marico Ltd, rural sales lag behind urban in Q4FY22, however, its management expects improvement in the second half of the year on account of government initiatives and good monsoon.
Another FMCG company Emami Ltd said that the company witnessed weak rural demand during 4QFY22 and remained weak in 1QFY23 as well.
“The MSP hike for kharif crops was significantly lower due to an increase in the estimated cost of agriculture and price commission. An MSP announcement to boost rural demand could be negative for the market, as the June 9 Kotak report added. has gone.
While the forecast of a normal monsoon this calendar year offers some hope, meaningful improvement in agricultural profitability and wheat procurement are other key monitorables.