Higher MSPs could spur inflation in FY19: Nomura2 min read . Updated: 20 Feb 2018, 06:47 AM IST
Higher MSPs and increased food-linked fiscal costs are an upside risk to the inflation outlook, due to which RBI is likely to keep policy rates on hold through 2018, Nomura says
New Delhi: Widespread rural discontent and its electoral implications prompted the government to promise higher support prices to farmers in the Union budget, which could push up retail inflation by 0.6% year-on-year in 2018-19, Nomura research said in a note on Monday.
Nomura estimated that the weighted average hike in kharif minimum support prices (MSPs) could double to 12.9% year-on-year in 2018-19, while the rise in rabi (winter crop) MSP could be lower at 6.6%. The one-time upward adjustment to MSPs could add 0.6% to headline consumer price inflation in 2018-19, the report said.
While MSP for paddy could rise 11.6%, that of wheat is likely to rise by 3.2% year-on- year in 2018-19, the report said. In his budget speech, finance minister Arun Jaitley had promised fixing of crop support prices in such a way as to provide a return of 50% over costs to farmers.
However, according to Nomura, the fiscal cost of higher MSPs is expected to be less than 0.1% of the gross domestic product (GDP) and the inflationary shock is likely to dissipate by the second year unless cultivation costs rise sharply.
The report added that higher MSPs and increased food-linked fiscal costs are an upside risk to the inflation outlook, due to which the Reserve Bank of India is likely to keep policy rates on hold through 2018.
On the possible impact of higher MSPs on cultivators, the report observed that farm incomes are likely to rise at a faster pace than in the recent past, but “it is not clear the current policies will be sufficient to significantly lift rural incomes."
Sluggish growth in real rural wages and lower demand for rural workers in the construction sector will have political ramifications as “while the budget appeared to indicate a big tilt towards farmers, the actual impact on their incomes may not be as large," the report said.
However, the report adds that the government has announced a slew of measures recently to produce faster results, driven by electoral pressures—assembly elections are coming up in Karnataka, Chhattisgarh and Rajasthan —and loss of rural constituencies in the Gujarat elections held last year.
These include raising import tax on farm commodities to improve domestic prices, a promise to farmers that the government will devise a mechanism to ensure benefits of MSP, and state governments ruled by the Bharatiya Janata Party announcing bonuses to farmers over MSP and crop loan waivers.
The report said that since 2014, lower MSPs contributed to food inflation moderating from double digits (between 2007 and 2013) to an average of 4% during 2015-17 while a supply glut last year “tipped the balance completely against food producers. Politically and economically, this had to change."
It added that “the BJP’s loss of rural constituencies in the Gujarat elections at end-2017 is a stark reminder of its 2004 ‘India Shining’ election campaign, which failed to strike a chord with the rural populace."