MSP hike: Will Modi government’s decision fuel inflation? Find out what global brokerages say

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Published: July 5, 2018 11:01:54 AM

The proposal to hike the Minimum Support Price (MSP) for Kharif crops was approved by the Union Cabinet on Wednesday.

 

The proposal to hike the Minimum Support Price (MSP) for Kharif crops was approved by the Union Cabinet on Wednesday. The MSP for paddy has been raised by around Rs 250 per quintal. While there have been some concerns over the hike in the MSP leading to higher inflation, NITI Aayog Vice Chairman said that he did not think there should be any concerns regarding price rise and fiscal slippage. Speaking to ET Now, Rajiv Kumar said that one must not look at negatives of the decision. It is food and fuel that is contributing to current inflation. Here’s what global brokerages have to say on the government’s MSP hike decision:

Nomura

The global brokerage Nomura says that impact of MSP hike on inflation and fiscal will depend on whether MSPs are made effective. On weighted average basis, MSP was hiked by 14.8 percent y-o-y in FY19 compared to 6.1 percent in FY18. Nomura estimates the impact of MSP hike on inflation at 20-30 bps and fiscal balance at 0.05 percent of GDP. The global brokerage also says that fiscal and inflationary implications will remain if effective procurement is rolled out.

UBS

UBS says the MSP hike is in line with the budget announcement of 50 percent above cost of production. The global brokerage also says that any price support to farmer bodes well towards improving rural demand. As per UBS, there will be  35-70 bps impact on CPI inflation depending on procurement policy executed by the government. UBS estimates fiscal impact to be 0.1 percent of GSP in FY19.

CLSA

CLSA says that MSP hike decision will impact fiscal deficit and inflation. The hike will be a  boost to rural incomes but at a cost of 10-20 bps to the fiscal, CLSA says.

The decision, taken by the Union Cabinet chaired by Prime Minister Narendra Modi, comes less than a year before next union election. In the Budget 2018, Finance Minister Arun Jaitley had proposed to hike MSP of crops to one-and-half times of the procurement cost.

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