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Will raising minimum support price necessarily lead to higher inflation?

High MSPs could raise food prices, fear experts; some analysts say there will be marginal, crop-intensive impact

Sanjeeb Mukherjee  |  New Delhi 

Minimum Support Price, MSP, kharif crop prices, rabi season
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To what extent will the government’s efforts to increase minimum support prices (MSPs) and spread their benefits translate into food And if they do, which are the crops that will be instrumental in pushing the price level up?

From the NITI Aayog to industry leaders to the (RBI), all are apprehensive that any major increase in MSP, following the 2018-19 Budget announcements, would push up prices, if not immediately, in the next six to eight months after the decision is taken.

The RBI, in its monetary policy, has said the revised formula for might have an impact on

However, there also are opposite views. Some experts say that the inflationary impact of the government guaranteeing an that’s 50 per cent more than the cost (costs paid and family labour) won’t be uniform and will be crop-specific for a temporary period. The government can address this through increases in supply, either domestically or through more import. “In many commodities the current is more than the production cost, hence there won't be an inflationary impact in them, while in others there could some rise in prices,” Ashok Dalwai, chief executive officer, (NRAA), told Business Standard. He said it was time the consumer-centric approach to farm policies changed.

A case in point as to how higher MSPs could affect is maize.

The for maize in the 2017-18 kharif season has been fixed at Rs 1,425 per quintal, while the cost of production is Rs 1,044 per quintal. This means an average return of around 36.49 per cent.

MSP

Source: Parliament papers/CACP

To fulfil the government’s promise, the for maize in the coming kharif season onwards (2018-19) has to go up by 14.5 per cent. This, many experts say, is bound to push up in the domestic market and also those of supplementary industries such as feed and poultry.

But, the counter view to this is that the (FHP) of many crops in India has been more than the though 2016 has been a big exception. When prices fetched outside the system are higher, why would anybody bother what happens to

A recent NITI Aayog paper suggested models of procurement, and advocated better markets and reducing the gap between producer and consumer to prevent prices from flaring up.

The data shows that of the 23 major crops for which Centre declares MSP, the rates of almost 13 need to be raised from the coming kharif harvest season to fulfil the Centre’s promise of guaranteeing a return that is 50 per cent more than the cost. Of those, the maximum increase (that is more than 30 per cent) has to be in the MSPs for ragi, jowar, sunflower seed and niger seed. The current for ragi is around Rs 1,900 per quintal, while the cost is estimated to be Rs 1,861 per quintal, giving a return of just 2.10 per cent over cost. This means to match the 2018-19 Budget announcement the government will have to raise its by a whopping 48 per cent. Now, how much that will push up ragi prices in the local market remains to be seen (see chart).

The for medium staple cotton has to rise by 27 per cent and that of long staple by 18 per cent. “The inflationary impact due to increased MSPs would largely be crop-specific. In wheat and rice, the public distribution system would support any inflationary impact, while in others imports can be an option and domestic supplies are also good enough,” P K Joshi, South-Asia director of the (IFPRI), tells Business Standard.

Madan Sabnavis, chief economist of CARE Ratings, too says there won’t be a big uniform rise in if MSPs are raised by 50 per cent over the cost. However, former secretary Shiraz Hussain thinks otherwise.

“In six to eight months they are bound to push up prices when rural markets recover,” Hussain said.

He said in crops like cotton, any arbitrary increase in without looking at market dynamics will kill its international demand.

Hussain, along with the former chairman of the Commission for Costs and Prices (CACP), in a recent policy paper for the on International Economic Relations, said that only cost plus pricing (1.5 times the cost A2+FL), which ignores the demand side, will lead to large-scale distortions.

First Published: Sat, April 14 2018. 22:18 IST
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