Effect of crop MSP hike on inflation will play out gradually, says Garg on RBI concern

The impact of hike in minimum support price (MSP) for kharif crop on inflation will gradually taper, the finance ministry said today notwithstanding the concerns raised by RBI in its third bi-monthly monetary policy review.

For the second time in two months, Reserve Bank of India earlier in the day raised benchmark repo rate to 6.5 per cent on inflationary concerns and cited hike in MSP for foodgrain as one of the reasons.

"The effect of hike in MSP will play out gradually over a period of time. So it appears to us that this is not a serious risk to inflation," Economic Affairs Secretary S C Garg told reporters here.

The Fiscal impact would come towards the end of this fiscal, he added.

As per the RBI's policy document, the increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation.

The central government has decided to fix the MSP of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19.

"A part of the increase in MSPs based on historical trends was already included in the June baseline projections. As such, only the incremental increase in MSPs over the average increase in the past will impact inflation projections," it said.

On RBI monetary policy action, Garg said it speaks about growth remaining unchanged.

"It also speaks of inflation, essentially saying that Q1 inflation has been lesser than the last projection. On inflation RBI's assessment is almost unchanged or slightly better. In the light of these factors growth seems to be unchanged," he said.

The third factor maybe the narrowing of output gap, he said.

So these maybe the basis for decision to hike repo rate, Garg said, adding, "we have taken note of it. Market reaction has not been turbulent, market has taken this very maturely. Rupee has appreciated somewhat, stock market has been almost unaffected. So we believe that effect of rate hike is not made much material difference to these key parameters."
With regard to revenue collection under Goods and Service Tax (GST), he said, "so far has been reasonable. We have everything under control."