Minimum Selling Price hike may trigger inflation

Analysts feel that the actual quantum of benefit of the move will depend on how it would be implemented by the Central and state governments.

Published: 05th July 2018 12:47 AM  |   Last Updated: 05th July 2018 12:48 AM   |  A+A-

For representational purposes (File | Reuters)

Express News Service

NEW DELHI: The decision of increasing the Minimum Selling Price (MSP) of agricultural crops may be good politics but bad economics, say analysts who feel that it would increase inflation and will cost the state exchequer 35,000 crore.

They feel that the actual quantum of benefit of the move will depend on how it would be implemented by the Central and state governments.

According to economist MS Swaminathan, announcement of higher MSPs is a welcome first step in the process of overcoming agrarian crisis, but this has to be followed by more action in terms of procurement and storage. According to him, the MSP announced is higher in absolute terms, but below the recommended level.

“It is difficult to envision a scenario in which the recently announced hike in MSPs actually translates into higher realisations for farmers, without an increase in prices for the end-consumers or costs for the Central and state governments through higher procurement costs and subsidy bill,” said Aditi Nayar, Principal Economist, ICRA Ltd.

Devendra Pant, economist with India Ratings and Research (Ind-Ra), said the advantage of the MSP hike will remain restricted to larger farmers.

Experts are, however, divided over the impact of the move on food inflation. According to Ind-Ra, the hike in MSP of Kharif crops for the 2018-19 season will impact wholesale inflation by 38 basis points (bps) year-on-year (YoY) and retail inflation by 70 bps YoY. This sparks concerns that inflation, along with crude oil price rise, will force the RBI to go for another interest rate hike.

“The impact from these MSP hikes will be 35 bps to headline inflation in the current fiscal year, and another 35 bps in the next. The MSP hike is broadly along expected lines, and may not accentuate concerns for the RBI on this account,” said Shubhada Rao, chief economist, Yes Bank.

Many feel the MSP may add a burden of Rs 30,000 crore. “It will have some impact, which will be to the tune of Rs 30-35,000 crore, but the government cannot be neutral towards agrarian crisis. We expect better revenue collection, which will offset its impact,” a senior Finance Ministry official told TNIE.

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