To cost Rs15,000 crore, says government; food inflation to rise 70 bps: analysts; cost may jump under assured-MSP plan.
With an eye on the general elections next year in the run-up to which it wants the rural incomes to be robust, the Narendra Modi government on Wednesday announced 4-52% increases in the minimum support prices (MSPs) for 14 kharif crops for the 2018-19 season and flagged the new MSPs being 50-97% higher than the full paid-out costs (A2+FL) as unprecedented and historic.
While the sharp increases in the support prices would themselves jack up the government’s expenditure, its plan to ensure that farmers actually realise the MSPs (by ramping up procurement and/or putting in place a mechanism to compensate farmers at the MSPs if procurement fails) could potentially increase the costs to the exchequer manifold. Also, it could drive up food inflation — and thereby cause a more generalised inflationary pressure — and make industrial goods like garments costlier.
The latest hike in MSPs will cost the exchequer over `15,000 crore, home minister Rajnath Singh said. “The weighted average MSP increase (crop weights being the quantity procured last year) comes to around 13%. Assuming the procurement of kharif crops would be as much as last year, the higher MSPs would cost the government about `11,500 crore,” said DK Joshi, chief economist at Crisil. But the actual cost incurred could be substantially higher as procurement was set to increase, he added.
India Ratings and Research’s chief economist Devendra Pant said that the latest MSP hikes will impact wholesale inflation by 38 basis points year-on-year and retail inflation by 70 basis points.
FE recently reported that the government’s plan to raise MSPs for crops to 1.5 times the A2+FL costs is likely to cost around Rs 1,75,000 crore in a full year if market prices are lower than the MSP by 20%. The estimate was based on the assumption that market arrivals might tend to be close to 100% of production if the assured-MSP plan is implemented.
Of course, the latest MSP increases are one of the steepest ever, but there were years (like 2008-09) when many crops saw similar or even sharper increases.
For instance, even though the paddy MSP increase for kharif 2018-19 is the steepest ever in absolute terms at Rs 200 per quintal, the year-on-year increase was 12.9% against 21% in the 2008-09 season. Also, the new MSP for tur is just 4.1% higher than last year’s (despite being 65.4% higher than A2+FL cost) against a year-on-year increase of 26% in 2008-09, the last year of the UPA-I government. However, since the procurements have been largely limited to rice (kharif) and wheat (rabi), the government’s costs have been prevented from being flaring up to unmanageable levels.
While the government has been working on deficiency payments schemes to ensure MSPs for farmers, it is yet to give a final shape to these schemes. The high costs of these schemes are being weighed. A NITI Aayog paper had mooted a “market assurance scheme”, which involves procurement and remitting MSP into farmers’ bank accounts, and a price-deficiency payment scheme or PDPS (under which farmers are paid the difference between MSP and sale price at mandis sans procurement). A third scheme where the private sector will be encouraged to procure crops at MSP with assorted incentives was also proposed. While the costs of these schemes have to be shared by the state governments, a PDPS-like scheme (Bhavantar) launched by Madhya Pradesh has ended up being a non-starter as the state could not foot the exorbitant bill.
“This will send a positive message to farmers and boost their confidence and end farm distress,” Singh said. Terming it as a historic decision, the minister said the sharp increase in MSP was done after lot of consideration and “not in hurry”. “This will increase the income of farmers and purchasing capacity, which will have impact on wider economic activity,” he said. To a query on likely impact of MSP hike on price rise, Singh said, “We are concerned about inflation. It is not correct to say that inflation will go up. We have controlled inflation in last four years and will succeed in controlling it in future as well.”
After slowing for four months in a row, retail food inflation started picking up again since April, having touched 3.1% in May against 2.8% in the previous month. Since an unfavourable base is likely to continue at least until October (food inflation hovered between -2.12% and 1.9% from June to October last year), any sharp hike in MSP, if backed by wider procurement network, could exert further inflationary pressure. Also, higher transport inflation due to elevated global crude oil prices could ultimately spill over to food inflation as well.
Food minister Ram Vilas Paswan said, “We will ensure that each grain is bought at MSP. We have fulfilled the promise. The decision is not linked to next year general elections.” Currently, market/mandi prices for most crops are below their announced MSPs.