Hike in MSPs in July was well below ones announced in FY09 & FY13, says RBI

The hike in minimum support prices (MSP) for kharif crop announced in July by the Narendra Modi Government was "well below" the ones effected under the previous UPA Governments in 2008-09 and 2012-13, the Reserve Bank has said.

The government had announced the hike in MSPs in July for the summer or the kharif crop, following a budget announcement affirming a 50 per cent mark up to farmers over the cost of produce. MSP on common variety of rice was hiked by Rs 200, along with other crops like cotton, and pulses like tur and urad.

It followed it up by declaring a hike for the winter crop as well last week. This included an increase of Rs 105 per quintal for wheat, and masur by Rs 225 per quintal, among others.

"In a historical perspective, the current increase in MSPs (announced in July) is significantly higher than the average of the last five years but well below the upward revisions effected in 2008-09 and 2012-13," the RBI said in the Monetary Policy Report published Friday.

The MPR said the hike for the 14 crops for the kharif 2018-19 season implies a nominal MSP increase in the range of 3.7 per cent to 52.5 per cent for different crops as compared to their levels last year.

The MPR, however, did not elaborate on the assertion beyond a visual chart depicting the MSP hikes for different commodities for multiple years.

It, however, said that the present MSP hike can lead to a 0.29-0.35 per cent hike in headline inflation, the RBI's core mandate.

"A first approximation of the inflationary impact of MSP increase...yields 29-35 bps increase in headline inflation," the MPR said, adding that the estimate is based on multiple methodologies.

It, however, added that the estimates are "highly tentative" in the absence of "robust information on the actual size and scale of procurement operations".

In its resolution for the fourth bi-monthly policy review announced Friday, the Monetary Policy Committee said an estimate of the impact of increase in MSPs has been factored in the baseline inflation projections.

The MPC estimated consumer price inflation, excluding the impact of house rent allowance hikes for government employees, to be 3.8-4.5 per cent for the second half of the current fiscal and will accelerate to 4.8 per cent in the first quarter of the next fiscal.

Meanwhile, on the crucial crude prices, the report said the 67 per cent surge in global crude prices in the last 15 months, to USD 78 per barrel in September, can lead to a decline in GDP growth and lead to a significant rise in inflation above the targets.

It said a USD 1 increase per barrel in crude oil cost can widen the current account deficit by $0.8 billion.