BackMinimum rise in MSP good for keeping inflation in check
Minimal hike in MSPs this year should offset to some extent the adverse impact of poor monsoon on food inflation
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The new government has raised the minimum support prices (MSPs) of several crops by only a token amount this year. Hike in MSPs has been one factor contributing to higher food prices and the minimal hike this year should offset to some extent the adverse impact of a poor monsoon on food inflation. As a Nomura Holding Inc. report says, a lower rise in MSPs “would be a medium-term positive for lowering the inflationary impulses in the economy, as MSPs form a floor on food prices."
The chart shows that hikes in MSPs were muted in 2013, but they’ve been reduced even further this year. In contrast, the huge hikes in 2009 led to rampant food inflation and, since MGNREGS wages are linked to the consumer price inflation, they went up too, leading to a wage-price spiral. There were some apprehensions about the new government’s stand on MSP, since the Bharatiya Janata Party had earlier said that prices should be set taking the cost of production plus a 50% profit margin for farmers. Those worries have now been scotched.
The low hikes will be a comfort to the Reserve Bank of India (RBI) in its fight against inflation. In his policy statement on 1 April this year, the RBI governor said, “There are risks to the central forecast of 8% CPI (Consumer Price Index) inflation by January 2015 stemming from a less-than-normal monsoon due to possible El Nino effects; uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo-political developments and their impact on international commodity prices." At least one of those factors is no longer a risk.
A Kotak report sums it up: “The government’s decision of moderate increase in minimum support price of kharif crop for FY2015 is a significant positive for India’s policy framework."
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