Modest MSP increase signals prudent policy, says HSBC

Cites limited reach of procurement machinery, suggests government action should maintain its focus on rural infrastructure, increasing crop insurance

The government's decision against an increase in minimum support prices (MSPs) bodes well not only for inflation, but also sends an important signal on its policy agenda says HSBC.

The MSP is the price at which the government buys agricultural produce from farmers.

HSBC Securities and Capital Markets' 'India Economics Comment' report released on 17th June said that this seems to signal an intent to move away from populist measures, and towards longer-term solutions.

"The inflationary impact of today’s policy decisions are likely to be nil to modest, and along with the unfolding trajectory of monsoon rains, will have implications for RBI’s policy for the rest of the year. Today’s move also provides color on the government’s policy agenda. So far, it points to prudent policy making over populism," said the report authored by Chief India Economist Pranjul Bhandari and Economist Prithviraj Srinivas.

The report noted that MSPs are only effective for two out of the fourteen Kharif crops in terms of the ability to help farm incomes. The payments themselves are made through procurement machinery which functions well in only four out of the country's 29 states.

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"As such, the damage it would cause via product market distortions and higher inflation would far outweigh the gains. In fact, as highlighted in previous reports, there are other channels such as crop insurance and increasing spend on rural infrastructure, which would do a far better job in supporting rural incomes and livelihoods," it said.

The government had announced last week a nominal Rs.50 increase in the price for paddy (per quintal). It also increased MSP for cotton, maize and pulses.

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