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India announces minimum support prices for more than 20 crops each year to set a benchmark. Photo: Mint
India announces minimum support prices for more than 20 crops each year to set a benchmark. Photo: Mint

MSP hike impact on Indian economy: What analysts say

The MSP hike will push up inflation, add to the fiscal deficit and prompt RBI to raise interest rates more steeply than expected, say analysts and economists

Mumbai: The government has raised the minimum support price at which the government will buy new- season common rice variety from domestic farmers by 13% as the Narendra Modi-led National Democratic Alliance looks to woo millions of farmers ahead of general elections due early next year. India, one of the world’s key producers of an array of farm commodities, announces support prices for more than 20 crops each year to set a benchmark. The Modi government said in its February budget that it would buy crops at 1.5 times the cost of production, a major shift after keeping the so-called minimum support price in low single digits over the past three years.

Analysts and economists have warned the move could help push up inflation, add to the fiscal deficit and prompt India’s central bank to raise interest rates more steeply than expected:

Upasna Bhardwaj, senior economist, Kotak Mahindra Bank

“Most of the wholesale prices are higher than the mininum support price (MSP). How that translates into market prices will be a function of how exactly the implementation of these MSPs would be. At this point, it is a little difficult to gauge exact impact on inflation. It seems to be inflationary, but magnitude is uncertain."

“There has been a lot of farm distress and measures have been taken to alleviate these problems, this being one of them. This move was something that was necessary, but needs to be implemented in the right way to ensure they get what they need, to be able to cover up for the costs."

Tirthankar Patnaik, India strategist, Mizuho Bank

“The Rs200 per quintal hike for paddy is very reasonable, so not likely to rattle markets. If the number was anything beyond Rs200, there could have been some market implication. The hike will add about a 25 basis point number to headline inflation, which the government would be okay with. I think this hike should not have too much of a negative impact."

“The hike in ragi crop was higher than expected. A larger hike in paddy would have moved the needle. So, this is a negative, but not an unexpected negative from a fiscal balance perspective. It is quite clear it was a question between keeping the farmer community happy in the pre-election year and also not to upset the credit rating agencies. With this hike for paddy, they have ensured the tightrope balance is fine."

“We may see these populist measures coming from the state governments instead of federal government. I’ll not be surprised if we see similar sops from the state government simply because the current GST collection, crude at over $70 does not leave much room for fiscal balancing by the central government."

Shubhada Rao, chief economist, Yes Bank, Mumbai

“The median hike from the minimum support prices (MSPs) is 25% compared with 3-4% in the last three years. The impact from these MSP hikes will be 35 basis points to headline inflation in the current fiscal year, and another 35 bps in the next. MSP hike is broadly along expected lines, and as such, may not accentuate concerns for the Reserve Bank of India on this account.“

“However, a larger concern emanates from continued elevated prices of crude oil. We maintain a risk of one more hike of 25 bps by October. We don’t see any material risk on fiscal as the impact is at a manageable level of 0.1% of GDP. In every preceding election year the MSP hikes have been high, like it was 40% in 2009, 27% in 2013 and 25% in 2018. This will help in boosting farmer income and potentially offset the adverse impact of high oil prices on growth."

A Prasanna, chief economist, ICICI Securities Primary Dealership Ltd

“The newly announced minimum support prices for Kharif crops mark a steep rise in prices. We estimate that the rise in support prices of cereals and pulses in FY 2019 will be nearly 25%, equivalent to the cumulative increase seen over the last five years. On a CPI-weighted basis, the increase amounts to 90 basis points, and we thus, expect at least 50 bps upside risk to forward-looking inflation estimate. Should the government rely on large-scale procurement of crops to implement these prices, then the fiscal cost could be around 0.3% of GDP, which will likely be shared by the central and state governments.

“As far as monetary policy is concerned, we expect the MPC to take note of the upside risk due to direct impact of higher MSPs, fiscal cost and second round effects. In tandem with further rise in oil prices and rupee depreciation since the June policy this development should cement the case for another hike. We continue to expect that hike to be delivered in the October meeting."

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