The government decision to hike the MSP of 14 kharif crops is a welcome step to address farmer distress in India, SBI said in its 'Ecowrap' report.
The immediate fallout of the announcement is an inflation impact, it added.
Various estimates placed inflation impact between 50-100 bps on Consumer Price Index (CPI), while fiscal impact would be in the range of 0.2 per cent to 0.4 per cent of GDP.
"However we believe, such estimated inflation impact could just be a statistical artefact and will only transpire if there is procurement by Government," the SBI research report said.
The report further said that it is well known that when the public agency starts procuring the crops at MSP, it ensures a convergence between market prices and MSP and thereby impacting inflation.
"For the statistically minded, our estimate suggests that, post announcement of MSP with 150 per cent hike in cost of production, the CPI inflation could increase by 73 bps and this could materialise in one or two quarters but purely subject to procurement by the Government/State Government," it said.
The report added that historical trends suggest that with no government procurement, market prices have often fallen below MSP due to demand-supply dynamics.
For example, in 2017-18 NAFED could procure only 6 per cent of overall pulses and oilseed production.
"To make the MSP effective, it is thus absolutely imperative that the Government needs to either procure/ supplement through price differential scheme /PDS," the report said.
It also suggested that farmers should have the right to sell at mandis at MSP and if the market price is less than MSP, the gap between MSP and market price should be reimbursed to the farmer.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)