New Delhi: The government raised the benchmark price for paddy for 2012-13 by more than 15% and for other deficient crops such as oilseeds and pulses by an unexpectedly sharp 30-50%, a move economists said will lead to inflation rising above 8% and keep food inflation in double digits for the greater part of the year.
“I was surprised by the quantum of the increases,” said Abheek Barua, chief economist at HDFC Bank Ltd. “The government has dealt with the supply deficit by raising the minimum support price (MSP), but I’m not sure it will sort the problem because there are deeper structural issues in agriculture.”
Barua and an another economist said the higher MSP will also thwart the government’s efforts to rein in the widening fiscal deficit as spending on crop procurement will shoot up.
MSP, set by the government before each of the two crop seasons, is for various state-run agencies to procure commodities at guaranteed prices to help farmers. Traders in the open market use these prices as a reference point, but do not always adhere to them.
India’s benchmark inflation rose in May to 7.55%, keeping price pressures elevated and making it harder for the central bank to revive economic growth with a widely expected interest rate cut next week. The rise in the Wholesale Price Index from 7.23% in April came as both food and fuel prices picked up, keeping inflation near its highest level this year.
Barua said the MSP announcement will make HDFC Bank revise its inflation forecast upwards by 20-50 basis points. He said he saw food inflation ranging at 8-15% with a bias on the upside through this year and headline inflation above 8% in December-January. A basis point is one-hundredth of a percentage point.
Ahmed Raza Khan/Mint
While the rise in rice MSP is in line with the increases seen in the past few years, the sharply higher MSP for oilseeds, pulses and at least one coarse cereal—jowar—is designed to encourage farmers to grow more of these crops that are in short supply and have to be imported.
Madan Sabnavis, chief economist at CARE Ratings, said the purpose may be defeated as farmers may still find growing essential foodgrains—rice and wheat—a better option, which may result in more supplies of these cereals reaching already overflowing government granaries.
“Farmers would still think that growing wheat and rice gives them a guaranteed market because other crops are not procured by the government in a big way,” he said. “That said, there would still be a sentimental impact on pulses and oilseed prices with the MSP set so high.”
Sabnavis said the cost of production will work out in favour of rice and wheat as they will be more profitable.
Jai Chand, a farmer in Sehrala village in Haryana, said he will not grow urad despite the 30% jump in its MSP over last year because antelopes in the area graze on the lentil.
Chand said he does grow jowar, but mostly as cattlefeed. He was sceptical about the 53% rise in its MSP over last year.
“At the grain markets, only rice and wheat are purchased. What is the point of MSP for other crops? Private traders don’t pay those rates,” Chand said.
The cabinet also cleared a special allocation of Rs 525 crore for improving the quality of drinking water in rural habitations, rural development minister Jairam Ramesh told reporters. He also has charge of drinking water and sanitation.
“For the first time, the government is allocating separate funds for ensuring the quality of water,” Ramesh said, adding that in the past, the tendency was to spend allocated resources on new sources of water rather than on efforts to improve quality.
For 2012-13, the government has allocated Rs 10,300 crore for rural drinking water, of which 5% has been earmarked for improving the quality of water, the minister said.
Improving the water quality will achieve two goals—reducing cases of encephalitis and Japanese encephalitis, which cause the deaths of hundreds of children in India, and reducing contamination by lethal chemicals such as arsenic, fluorides and iron, besides tackling salinity, Ramesh said. India has 1.7 million rural habitations, of which 3,500 are affected by arsenic contamination, 17,400 by fluoride contamination, 53,000 by iron contamination, and 23,000 by water salinity, he added.
Besides this, Ramesh said his ministry had secured a World Bank grant of $500 million (Rs 2,790 crore) for extending the rural drinking water programme in Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Uttar Pradesh and West Bengal. The finance ministry had also agreed to a proposal to set up 10,000 solar-operated water pumps in 78 Maoist insurgency-affected districts of India, he said. The rural development ministry will spend Rs 172 crore on this project, while state governments will put in a similar amount. The rest of the money—Rs 230 crore—will come from the National Clean Energy Fund set up by the government in 2010.
Ramesh also said he will ask the Planning Commission to take immediate steps to bring Sukma in Chhattisgarh under centrally-sponsored development programmes, describing it as the worst Maoist-affected district in the country. Sukma was in the news recently after its collector Alex Paul Menon was kidnapped by Maoist rebels in April. He was set free after 11 days.
The cabinet also approved a proposal to include 22 new districts in the list of those that qualify for the backward regions grant fund, which aims to speed up development in identified districts, a government statement said. There are already 250 districts in this category. The move will mean an increase in the allocation of funds from the existing Rs 5,050 crore to Rs 5,340 crore.
The cabinet also approved the inclusion of four more districts in the Integrated Action Plan programme meant for the uplift of tribal areas. The expansion of the programme means an increase in allocation from Rs 2,340 crore to Rs 2,460 crore, it said.