Relentless increases in the MSPs for kharif and rabi crops over the last five years have led to higher disposal incomes with rural households, spurring consumption, but also fanning inflation, especially of food items, due to the increased demand. The government has raised the MSPs of various crops in the range of 30% to 91% in the last five years.
We are concerned about inflation and we can control prices of grains which we procure (with R50 hike in the wheat price), food minister KV Thomas said after a meeting of the Cabinet Committee on Economic Affairs (CCEA), without elaborating.
The CCEA on Thursday decided to raise the benchmark wheat price by R50, or 3.7%, to R1,400 a quintal for the year through June. It, however, rejected a proposal by the agriculture ministry to raise the MSP of wheat by R100, or 7.4%, to R1,450 and instead accepted recommendations of the Commission For Agricultural Costs and Prices (CACP).Analysts said the mild hike in the wheat MSP is basically to balance the interests of farmers with consumers as well as of the government.
"The 3.7% hike in the wheat MSP is a cautious step by the government and it could have a mild impact on food inflation. The food subsidy bill will, of course, rise but the pace of rise in the bill may not surge significantly as the food security Bill is expected to be rolled out from next fiscal only," said DK Joshi, chief economist at Crisil.
While there was no official statement, ostensibly because the government may have to seek clearance from the Election Commission due to assembly polls scheduled for five states, a senior official said the CCEA had approved all the CACP recommendations on prices. Since official wheat procurement will start from April next year after the crop is harvested, the impact on the food subsidy bill will mainly be felt in the next fiscal, although the benchmark prices tend to influence the current price in the open market, analysts said.
The CACP had also suggested that the MSP of mustard seeds be raised by Rs 50 to Rs 3,050 per quintal, barley by Rs 120 to Rs 1,100 a quintal, gram by Rs 100 to Rs 3,100 a quintal, lentil by Rs 50 to Rs 2,950 a quintal, and safflower by Rs 200 to Rs 3,000 a quintal for the rabi marketing season.
CARE Ratings chief economist Madan Sabnavis said that while the hike in the MSP can be inflationary, the government has reduced the quantum of the rise this year, compared with around a 16% hike in 2012-13.
Average food inflation in the first half of this fiscal remained elevated at 12.24%. Although onion and vegetables were the prime drivers of food inflation this fiscal, the price rise in rice stood at 19.34% and wheat at 11.16%. The latest hike will further raise wheat prices, albeit mildly, and lead to higher inflation, analysts said.
Trade executives say that if grain prices remain subdued due to adequate stocks and a good harvest, the government will be forced to procure more from farmers to avoid distress sales, worsening its subsidy bill.
The government has budgeted the food subsidy bill for 2013-14 at Rs 90,000 crore, although official sources said it could exceed the Rs 1 lakh crore level even if the food security Act isn't implemented, thanks to a 4.6% rise in paddy prices already witnessed, said a government official.
The government's food subsidy bill rose 16.7% to Rs 85,000 crore last fiscal while the budget estimate was Rs 75,000 crore. Once the food security Act, which aims to provide legal entitlement for subsidised grains to around three-fourths of the country's population, is implemented throughout the country, the food subsidy burden is expected to hit around Rs 1,25,000 crore.
Meanwhile, farmers are opposed to the paltry hike in prices, saying it does not cover even the cost of production due to a spike in inputs and labour costs.