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Steeper MSP hikes likely as farm input costs soar

Any such move could inflate procurement costs for welfare programmes and potentially add to price pressure, putting both the government and the central bank in a tricky situation, as they step in to douse the inflation fire in the wake of the Ukraine crisis.

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According to the official data, imported urea prices rose by more than 145% to $930 a tonne in April 2022 from $380 a tonne a year ago.

A spurt in farm input costs will likely force the government to announce a higher-than-usual hike in the benchmark prices of summer-sown crops for the crop year starting July, sources told FE.

Any such move could inflate procurement costs for welfare programmes and potentially add to price pressure, putting both the government and the central bank in a tricky situation, as they step in to douse the inflation fire in the wake of the Ukraine crisis.

In 2021-22, the government had raised the minimum support prices (MSPs) of over a dozen Kharif crops by just 1-7% from a year before (See chart). The hike this time around could be more substantial, if not massive, as the government will seek a middle ground to balance the interest of producers with that of consumers, said the sources.

A senior finance ministry official conceded that the surge in input costs is “definitely a matter of concern” and could ultimately drive up the food subsidy bill. If the cost of farm production soars, the MSPs may have to be hiked accordingly.

There is also a fear that the surge in wheat prices, which forced the government to cut short its MSP-based procurement programme and imposed a ban on its exports, could influence the price movement of rice as well, possibly with a time lag, despite adequate stocks. As such, the government on Saturday replaced a part of its pledged supply of wheat under the food security law with rice. So, if the MSP isn’t hiked in sync with market realities, official paddy procurement may also sink in 2022-23.

The government’s recent move to extend the supply of free grains until September is estimated to cost Rs 80,000 crore over and above the FY23 budgetted food subsidy of Rs 2.06 trillion. Any decision to extend it further will cost substantially more.

The Commission for Agricultural Costs and Prices (CACP), which recommends the MSPs of various crops to the government, factors in the so-called A2+FL costs, among others. ‘A2’ typically covers all paid-out costs (in both cash and kind) directly incurred by the farmer on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc. ‘A2+FL’ refers to A2 costs, plus an imputed value of unpaid family labour. Most of the costs are beyond the control of the government.

Given the elevated price of diesel, irrigation costs are set to rise. Prices of pesticides and seeds have already started rising. Analysts expect rural wages, which remained rather subdued last fiscal, to inch up again this year.

The government has decided to absorb a substantial part of the rise in fertiliser prices (it expects the FY23 fertiliser subsidy to rise by at least Rs 1 trillion from the budgetted level of Rs 1.05 trillion, while some analysts see the bill to be even as high as Rs 2.5 trillion). However, last month, largest fertiliser seller IFFCO announced an up to 58% hike in the prices of (the decontrolled) non-urea fertilisers.

The government has borne a large part of the rise in prices of phosphatic and potassic (P&K) fertilisers by hiking the nutrient-based subsidy (NBS) rates in 2021-22 and for the kharif season (April-September, 2022). The increase in subsidy is meant to insulate farmers from the increases in the prices of di-ammonium phosphate and other non-urea nutrients in the global markets. These soil nutrients are largely imported.

Retail prices of P&K fertilisers, including DAP were ‘decontrolled’ in 2010 with the introduction of a ‘fixed-subsidy’ regime as part of NBS mechanism. However, the subsidy on DAP saw an increase to 60% of cost in FY22, from a little over 30% previously.

According to the official data, imported urea prices rose by more than 145% to $930 a tonne in April 2022 from $380 a tonne a year ago.

Having declared a dramatic increase in MSPs in 2018 to ensure farmers get 50% over the paid-out costs, the government has since settled for modest hikes. In 2018, the year in which the cost-linked norm was introduced, the increases for some crops were in the range of 50% to 97%.

While an elevated MSP, backed by procurement, can potentially boost rural income and purchasing power, they can potentially stoke inflationary pressure.

Icra chief economist Aditi Nayar said: “Higher MSPs may be warranted given the rise in various input costs. This will raise the government’s cost of procurement of those items that are widely procured, such as wheat and rice. However, the prospect of higher wheat exports may offset the impact to some extent.”

DK Pant, chief economist at India Ratings, said: “A higher increase in input prices will push up the cost of production, which is likely to be reflective on higher MSP.” In the last revision, the MSP of wheat was increased by only 2% but input prices have risen substantially after that. “A sharp increase in the MSP for paddy will have adverse impact both on fiscal side (subsidy) and inflation,” Pant added.

Retail inflation hit a 95-month high of 7.79% in April and price pressure in food items scaled a 17-month high of 8.38%. Primary food article inflation, at the wholesale level, rose to 4.1% in the last fiscal from 3.2% in the previous year.

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