New Delhi: Higher minimum support prices for farm commodities that finance minister Arun Jaitley promised in Union Budget 2018 are set to fuel food price inflation in the 2018-19 procurement season.

Jaitley, however, sought to downplay the inflationary impact of the measure, aimed at reducing rural distress.

Food inflation may accelerate in June-July, when government agencies procure farm produce for sale through the subsidized public distribution system, experts said, adding that its impact on overall consumer price inflation would be less pronounced.

A spike in inflation could prompt the Reserve Bank of India, which in its December monetary policy review kept key interest rates unchanged citing inflation risks, to consider tightening policy.

To give remunerative prices to farmers hit by falling prices after a bumper crop, Jaitley said the government will offer a minimum support price (MSP) that’s 50% above the cost of production of remaining rabi (winter) crops as well as kharif (summer) crops. At present, 23 crops are backed by MSP although only some of them, such as rice and wheat, are efficiently procured.

“I am confident that this historic decision will prove an important step towards doubling the income of our farmers," the finance minister said.

Jaitley also proposed to raise food subsidy by 21% or 9,041 crore to .69 trillion for 2018-19. While the fertilizer subsidy was raised marginally in the next fiscal year from the revised estimate for the current year, the petroleum subsidy estimate has been kept unchanged at over 24,000 crore.

N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the decision to widen the ambit of MSP will have an inflationary effect on food prices and a partial effect on retail inflation. “That, however, will not result in a deviation from the inflation target range of 2-6%," said Bhanumurthy.

The FM downplayed the potential impact on inflation. “We don’t see any serious impact on inflation with these measures. Don’t think the market was reacting maturely today. There’s nothing in the budget that will make prices go up," said Jaitley. “Higher food prices have an effect but so do a lot of other things. And in this country, in the past, inflationary levels have always been very high and today the situation is such that inflation can be contained within 3-4%."

Crisil chief economist D.K. Joshi said widening the scope of MSP has the potential to fan food inflation although much will depend on how it will be implemented. Retail inflation will depend on a lot on factors like oil prices, he added.

Retail inflation and food inflation have been rising since June. According to data from the Central Statistics Office (CSO), retail inflation measured by the consumer price index (CPI) accelerated to 5.21% in December, the fastest pace in 17 months, from 4.88% in November. Retail food inflation rose to 4.96% in December from 4.42% the previous month.

The central bank had left the repurchase rate—the rate at which it infuses liquidity in the banking system—unchanged at 6% in the last policy review, but it raised its fiscal second-half inflation estimate range marginally from 4.2%-4.6% to 4.3%-4.7%. RBI has a medium-term CPI-based inflation target of 4%, which could vary either way by up to two percentage points.

Shaswati Das and Meenal Thakur contributed to this story.

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