‘Crop shortages could quicken inflation following MSP hikes’ 

“In case of any shortfall in production of any crop, prices can increase at a faster rate and add to inflation.”
| Photo Credit: MOHD ARIF

The inflationary impact of the 5%–11% increase in the minimum support price (MSP) for farm produce will be an additional factor for the RBI’s Monetary Policy Committee (MPC) to consider in its ongoing bi-monthly policy review to be announced on Thursday.

The spillover effects on consumer food prices from higher assured remuneration to farmers will hinge on the government’s procurement strategy for foodgrains and prevailing market prices, but any production shortages could lead to higher prices, economists cautioned. 

For instance, the 7% increase in paddy MSP could lead to higher prices if the crop is not higher than last year’s output, said Bank of Baroda chief economist Madan Sabnavis, who termed the increases in MSP ‘quite aggressive’ relative to past increases, which had been in the 4% to 6% range.

“Procurement takes place for rice, whose inflation is already high at 11%,” noted Mr. Sabnavis. “So an increase of 7% will add to benchmark prices in the market. Similarly, jowar, bajra and maize are all running inflation of 13%-15% and hence, also run a risk of higher prices in case of crop failure in any part of the country,” he added.  

“In case of any shortfall in production of any crop, prices can increase at a faster rate and add to inflation. The crux will hence be the size of the crops this season,” he said, stressing that food prices are the major risk to inflation so the Reserve Bank of India will be cautious until there is more clarity on kharif crop prospects. 

State Bank of India economists said that the impact of higher MSPs on inflation “will be negligible” depending on the prices prevailing in the e-National Agriculture Market (e-NAM) as well as procurement levels. 

While procurement of cereals was primarily in terms of wheat and rice, the procurement of pulses was not much, noted SBI Group chief economic advisor Soumya Kanti Ghosh. Moreover, he pointed out that the average modal prices in e-NAM mandis were already higher than the MSP for some of the crops.