How will this double-digit MSP hike impact consumer goods and rural sales?

A third of FMCG and durable sales come from rural areas and an uptick in rural consumption augurs well for these FMCG businesses, analysts tracking the market said

The 24 per cent increase in minimum support prices (MSPs) for kharif crops, announced Wednesday, will impact sentiment positively, pushing up rural sales growth, executives of some of the top fast-moving consumer goods (FMCG) and durable companies have told Business Standard.

A third of FMCG and durable sales come from rural areas and an uptick in rural consumption augurs well for these businesses, analysts tracking the market said.

“The (MSP) announcement is timely and comes when the monsoon has been advancing well across the country. This will certainly help push up sentiment,” Sunil Duggal, chief executive officer (CEO), Dabur India, said. 

The Ghaziabad-based ayurvedic firm, along with the country’s largest consumer goods company Hindustan Unilever (HUL), has a higher rural exposure than the industry average, sector analysts said, deriving 35-40 per cent of its revenue from the hinterland.

Sumit Malhotra, managing director, Bajaj Corp, the maker of hair oils such as Bajaj Almond Drops, said while a procurement policy by the government was yet to be announced, the MSP hike, the highest in six years (the last was in 2012-13 at 29 per cent), would leave more disposable income in the hands of consumers, aiding consumption. This point is also endorsed by a Nestlé India spokesperson, who says that higher MSPs would positively impact rural incomes.

“Rural sales growth for the (FMCG) market has been improving since the fourth quarter of 2017-18. It is now likely to surpass urban sales growth with the latest announcement,” Malhotra said.

A recent report by Nielsen said that the January-March 2018 period saw rural markets for FMCG companies growing 1.4 times that of urban markets, with the trend likely to get stronger with a good monsoon and more rural-focused initiatives (including higher MSP) by the government, heading into a general election in 2019.

Kamal Nandi, business head and executive vice-president, Godrej Appliances, said that rural markets had high growth potential, given the lower penetration of consumer goods and durables in general, implying that any effort to alleviate rural distress was a welcome move.

“With a good monsoon and higher MSPs, festive season sales are sure to rise,” Nandi said. “This will be a huge plus for the industry, grappling with currency volatility and input costs pressures,” he said.

Kapil Agarwal, CEO, Groupe SEB, which markets the Maharaja line of kitchen and home appliances, says that MSP hikes would improve discretionary spending in rural areas, which had halted after disruptions such as demonetisation and a new indirect tax regime. “While the rupee slide and crude oil spike have led to a new round of price hikes in June, making it a little costly for consumers, effort to improve rural incomes is a good sign,” he said.

Foreign brokerage houses such as UBS on Thursday said that the price support to farmers would aid rural demand and the fiscal impact would be 0.1 per cent of gross domestic product in the current financial year.

How rural growth is inching up

• Rural growth was 1.1 times urban growth in 2017 (full year)
• It grew 1.4 times urban growth in Jan-Mar 2018
• Estimates are it will cross 1.6 times urban growth in Apr-Jun 2018 and will be higher in the last three quarters of 2018-19