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MOSL: RURAL INDIA: Rural consumption recovery playing out well; MSP announcements add to the cheer

Rural India: Rural consumption recovery playing out well; MSP announcements add to the cheer

 

MSP announcements add to Rural Cheer

The much-awaited decision on minimum support price (MSP) is finally made. Making good on its budget announcement, the government approved the hike in MSP of all Kharif crops to 1.5x of the cost of production (based on A2+FL) - the hikes are good and have met our expectations. Consequently, MSP growth ranged from 3.7% (for Urad) to 52.5% (for Ragi), implying production-weighted average growth of 15.8% in FY19 v/s 7.1% in FY18 (and average growth of 4.3% over the past four years). 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). 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, in our view.

 The IMD has predicted normal monsoon season rainfall - at 3% below the long-period average (LPA) - in 2018. Although rainfall has been 7% below LPA from 1st June to 5th July 2018, one would need to watch for rains during July and August, which are the more crucial months, accounting for ~63% of the southwest monsoon rainfall. If rainfall improves and the IMD's forecast materializes, this would be the third consecutive year of normal monsoon. This bodes well for agricultural output in FY19.

 Rural consumption recovery theme playing out well; drivers in place

Our long-held view of "Consumption Recovery in CY18" is playing out well. As argued in our Rural Strategy reports released in Aug'17 and Nov'17, the drivers of rural consumption are playing out well. Commentaries of rural-focused corporates in sectors like Autos, FMCG, NBFC have turned positive post Dec'17, and the trends were reaffirmed in 4QFY18 result commentaries as well.