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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

Ishan Bakshi 

With current market prices well below the support prices, experts fear the hike is likely to be inflationary
With current market prices well below the support prices, experts fear the hike is likely to be inflationary

The central government last week announced a sharp hike in (MSPs) of

As shown in Chart 1, the 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 isn’t an outlier. As shown in Charts 2 and 3, previous governments have also tended to increase MSPs sharply around

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 Analysts expect the headline (CPI) to increase by 50 to 90 basis points in FY19.

ALSO READ: Increase in MSP may negatively impact GDP, lead to higher inflation: Report

The earlier data showed that the 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 had projected.

In its last monetary policy meeting, the had projected the 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 (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 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

First Published: Mon, July 09 2018. 00:02 IST
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