Steep hike in kharif MSPs may cost govt Rs 350 billion

Cabinet decision comes ahead of assembly polls in some key states

The Union Cabinet on Wednesday approved a sharp hike in minimum support prices (MSP) of kharif crops for the 2018-19 season in a bid to contain the farm sector distress. However, some farmers’ organisations argued that it was a small victory for them as the increased prices were still below the comprehensive cost of production. While the decision is being seen as a populist measure ahead of Assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh (big producers of kharif pulses, oilseeds and coarse cereals), it has also triggered concerns of a spike in food inflation. 

The decision will imply a dent of Rs 150 billion to the exchequer immediately, according to officials. Sources, however, said that was a conservative estimate and the final figure could be more than double at around Rs 350 billion once the purchase price of oilseeds and pulses was taken into account. 

Union Home Minister Rajnath Singh told reporters after the Cabinet Committee on Economic Affairs (CCEA) meeting that the MSP hike was a step towards fulfilling the government objective of doubling farmers’ income by 2022. "It will have a pass on impact on the entire rural economy," he said. The government was confident of addressing any impact on inflation, he said, adding that it would not shy away from taking steps to improve the condition of farmers. Reacting to the government move, shares of companies related to the agriculture sector surged by up to 13 per cent.

The extent of impact on food inflation would depend on the government mechanism to ensure that crops, other than wheat and rice, are also purchased from farmers in consultation with the NITI Aayog, according to people in the know. A formal announcement on the model is expected soon. “In the short term, the impact on inflation due to the hike in MSPs will vary from crop to crop. It will also depend on the procurement mechanism," said Shashank Bhide, director of Madras Institute of Development Studies. In the long term, much would depend on farmers’ response to high MSPs and the improvement in production, he added. 

According to A Prasanna of ICICI Securities, the headline CPI is expected to rise by 50-90 bps immediately due to the MSP increase. The input cost for the calculation of MSPs has been based on A2+FL cost and not C2, a long-standing demand of farmers’ groups. A2+FL broadly implies all input cost plus own and family labour, while comprehensive cost (C2) includes all paid-out expenses incurred, plus imputed value of unpaid family labour along with rentals and interest foregone on owned land and fixed capital. MSP fixed on the basis of C2 cost is much higher than that fixed over A2+FL cost.

However, in the absence of a formal procurement model for crops other than paddy and wheat, the new MSP mechanism may not translate into big gains for the end farmer because conventionally there is no regular system to purchase non-cereal crops. The MSP of common grade paddy, the biggest foodgrain grown during the kharif season, has been hiked by Rs 200 a quintal to Rs 1,750  — the steepest in recent times.