Muted MSP hike positive for food inflation: Nomura

The recent 5% hike in the MSP against 15% average hike in support price for farm produce in the last six years is likely to have only a nominal impact on food inflation Japanese brokerage firm Nomura said in its research report.

 

Government last week raised the MSP of nine farm items, including some pulses and oilseeds, in the range of Rs 60-450 per quintal for the 2013-14 crop year (July-June), while the price for five crops like urad and ragi were kept unchanged.

 

Currently, farmers are sowing kharif crops. The announcement of MSP will help farmers decide which crop to sow for better returns.

 

"The MSP raised by around 5% is much more muted than the average of the last six years' 15% and compared with the current rise in farm input costs. This is good news for food inflation," Nomura Economist Sonal Varma said in a report.

 

The government has accepted recommendations for a moderate rise in MSP for various summer crops. Using WPI weights, we estimate that the average MSPs were hiked by around 5.2% YoY in FY 14, down sharply from 22% last year and a six year average of 15 percent, Nomura said.

 

The comparatively small hike comes despite rising farm input costs.

 

"We estimate that farm input costs are rising at 16% y-o-y currently due to higher labour, diesel, fodder, electricity and fertiliser costs. This is possibly because of the already large stock of rice held by the government and other macroeconomic considerations, such as general inflation," Varma said.

 

From the medium-term perspective, Nomura sees a muted rise in MSP as positive for food inflation as the double-digit MSP hikes of the last six years had raised food inflation (MSP forms the floor for the market price) and led to a wage-price spiral (food inflation leads to high CPI inflation and rural wages are linked to CPI).

 

A trend of lower MSPs should help break this wage-price spiral, Nomura report said.

 

In 2012, there was drought in four states, leading to a fall in foodgrain production by four million tonnes to a little over 255 mt. This year, the monsoon is expected to be normal.