In a significant boost to the agricultural sector, the Union Cabinet on Wednesday announced a hike in the Minimum Support Price (MSP) for 14 Kharif crops for the 2024–2025 season. The increase ranges between 1.4% and 12.5%, with paddy, the most widely cultivated crop, seeing a notable 5.35% rise in its MSP. The highest absolute increases have been recommended for oilseeds and pulses.
This is the first major decision taken by the Union Cabinet during Prime Minister Narendra Modi's third term in office. The MSP hike, projected to have a financial implication of ₹two lakh crore for the government and expected to result in an estimated gain of ₹35,000 crore for farmers compared to the previous season, is aimed at significantly boosting farmers' incomes and improving their economic conditions.
The increase in farmers' income is anticipated to have a ripple effect on various sectors heavily dependent on the rural economy. Sectors such as fast-moving consumer goods (FMCG), consumer durables, and the automotive industry, particularly two-wheelers and tractors, are expected to experience a surge in volumes as rural purchasing power increases.
Additionally, the fertiliser and irrigation sectors are poised to benefit. Moreover, the banking sector is likely to see positive effects from the higher income levels among farmers, which could lead to increased deposits and credit uptake in rural areas.
Meanwhile, the MSP hike for oilseeds and pulses will help reduce India's dependency on imports, promote self-sufficiency, and ensure better returns for farmers.
Notably, FMCG and auto stocks have been trending higher in recent sessions as investors anticipate that a new coalition government, comprising the BJP and its allies, may prioritise rural spending over capital expenditure, marking a departure from previous strategies.
Contrary to exit poll expectations, the BJP has underperformed in the three largest states: Uttar Pradesh, Maharashtra, and West Bengal, all of which have a significant rural and agricultural voter base. With state elections in Maharashtra scheduled in less than six months, the government recognised the urgent need to address the concerns of the rural population and took significant steps to boost the rural economy.
For instance, the hike in paddy support price comes despite the government sitting on surplus rice stocks.
Immediately after assuming office, the central government was on its toes to address the voting gaps it saw in farm-heavy states and rural markets. The release of a farmer installment of ₹2,000 and financial assistance to build 30 million new houses in rural and urban areas indicate a policy shift towards improving spending in rural markets.
Bharatiya Janata Party, or BJP, the largest party, falling short of a majority in the 2024 general elections, came as a surprise to the leadership’s plan and media consensus. However, the support of two pro-reform-oriented regional parties (TDP and JDU), with limited conditions, helped ease the initial disappointment.
"Slow decision-making is going to be the norm as the budget session of Parliament has been delayed to the end of July 2024. We feel the rural policy narrative will improve and may lead to passing on lower crude oil price benefits to consumers," said domestic brokerage firm Incred Equities in its recent report.
The Union Budget, scheduled for end-July 2024, will be closely watched for how the government uses the fiscal headroom provided by the huge RBI dividend.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
