The State Bank of India on Friday welcomed the government’s decision to hike the minimum support price (MSP) for 14 kharif crops even though it cautioned that the populist move could increase retail inflation. In its ‘Ecowrap’ report, which was released on Friday, the government-run bank said while the move would address farmer distress in the country, the immediate fallout of the announcement would be a rise in inflation by 73 basis points depending upon the level on procurement.
“However we believe, such estimated inflation impact could just be a statistical artifact and will only transpire if there is procurement by Government,” the SBI research report said. Various estimates have placed inflation impact between 50-100 bps on Consumer Price Index (CPI), while fiscal impact has been predicted in the range of 0.2 per cent to 0.4 per cent of GDP.
The report further said for effective results, the government required to procure or supplement through the price differential scheme. “To make the MSP effective, it is thus absolutely imperative that the Government needs to either procure/ supplement through price differential scheme /PDS,” the SBI report said.
On Wednesday, the Cabinet approved the highest absolute hike ever in MSP for paddy, besides a significant increase for other Kharif crops. The MSP for common grade paddy has been increased from Rs 1,550 per quintal to Rs 1,750 per quintal, an increase of nearly 13 per cent. However, the decision has been panned by Congress as “an electoral lollipop”.
The report further said that there would a convergence between market prices and MSP when the public agency would start procuring the crops at MSP and thereby impact inflation. “For the statistically minded, our estimate suggests that post announcement of MSP with 150 per cent hike in the cost of production, the CPI inflation could increase by 73 bps and this could materialise in one or two quarters but purely subject to procurement by the government/state government,” it said.
The report added that historical trends suggested that with no government procurement, market prices had often fallen below MSP due to demand-supply dynamics. For example, in 2017-18, NAFED could procure only 6 per cent of overall pulses and oilseed production.
It also suggested that farmers should have the right to sell at mandis at MSP and if the market price was less than MSP, the gap between MSP and market price should be reimbursed to the farmer.
(With PTI inputs)