NEW DELHI: The announced hike in the minimum support prices by the Union government might result in an increase in retail inflation of as much as 73 basis points (0.73 per cent), noted a report by SBI Research on Friday.
Noting that while the government decision to hike the MSP of 14 kharif crops is a welcome step to address farmer distress in India, the immediate fallout of the announcement is an inflation impact. Various estimates have placed inflation impact between 50-100 basis points (bps) on the Consumer Price Index (CPI), and fiscal impact 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 report pointed out, adding that its "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".
The report also went on to note 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. Historical trends suggest that with no government procurement, market prices have often fallen below MSP due to demand-supply dynamics.
"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.