Statsguru: Sharp hike in minimum support prices likely to up CPI

NDA government fulfils its budget promise of providing MSP at 1.5 times cost

The central government last week announced a sharp hike in minimum support prices (MSPs) of kharif crops. 

As shown in Chart 1, the MSP for paddy was hiked by Rs 200 per quintal to Rs 1,750, the steepest hike (in absolute terms) in recent times. With this, the government has fulfilled its budget promise of fixing MSPs at 1.5 times the cost.

But this increase in MSP isn’t an outlier. As shown in Charts 2 and 3, previous governments have also tended to increase MSPs sharply around general elections.

With current market prices well below the support prices, experts fear the hike is likely to be inflationary. As shown in Chart 4, paddy alone has a weight of 4.7 per cent in the CPI. Analysts expect the headline consumer price index (CPI) to increase by 50 to 90 basis points in FY19.

The earlier data showed that the CPI had risen to 4.87 per cent in May, up from 4.58 per cent in April, suggesting that this increase in MSPs may push inflation beyond what the RBI had projected.

In its last monetary policy meeting, the RBI had projected the CPI to range between 4.8 and 4.9 per cent in the first half of FY19, slowing to 4.7 per cent in the second half. As a consequence of this hike, some economists don’t rule out a rate hike by the monetary policy committee (MPC) in August. The impact of the hike on the government’s finances is difficult to ascertain in the absence of any clarity on how much will be actually procured. As shown in Chart 5, procurement by FCI is limited to a few crops, while pulses procurement is done largely by Nafed. Further, as seen in Chart 6, FCI’s arrears for past procurement are building up. 

According to government sources, the hike may end up costing Rs 350 billion. Yes Bank expects it to impact the deficit by 0.1 per cent of GDP, while Nomura expects it at 0.05 per cent. 

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines; Source: Reserve Bank of India’s Financial Stability Report, June 2018; Compiled by BS Research Bureau