The government has decided to sharply increase the minimum support price for Kharif crops, as it responds to concerns about distress in the country’s farm economy despite two years of strong monsoons.
The MSP for common variety paddy, the most important Kharif crop, will be raised by Rs 200 over last year’s Rs 1,550 per quintal, said the government. That works out a 13 percent increase for the financial year ended March 2019 compared to a 5.4 percent increase in FY18.
The year-on-year jump in MSP for most other Kharif crops has also been far steeper than the annual increases announced over the last three years. Ragi and Jowar saw among the steepest price increases of 52.4 percent and 42.9 percent respectively. The MSP increase for moong in the pulses category stood at 25 percent. For cotton, the support price was hiked by 28 percent.
The higher support prices will benefit the rural economy and improve the purchasing power of the farm sector, said Union Home Minister Rajnath Singh at a press conference in New Delhi. The additional government spend on account of the higher MSPs will be to the tune of Rs 15,000 crore, Singh said.
Upholding its budget promise, the cabinet has ensured that the MSP for the Kharif season is 50 percent above the cost of production, Agriculture Secretary Shobhana Pattanayak told BloombergQuint. The formula used for the cost of production is ‘A2 + FL’, which takes into account the actual cost plus imputed value of family labour.
In the Union Budget, the government had assured farmers of a minimum support price of 50 percent above cost as a way to ensure that farm incomes double by 2022. However, at the time, there was no clarity on the cost formula to be used.
The MSPs for this year’s kharif crops are 50-97 percent higher than the A2+FL prices, and 4-52 percent more than last year, said D.K. Joshi, chief economist at rating agency Crisil in a note.
The weighted average MSP increase (crop weights being the quantity procured last year) comes to around 13 percent. Assuming the procurement of kharif crops would be as much as last year, the higher MSPs would cost the government about Rs 11,500 crore. But the actual cost incurred could be substantially higher as procurement is set to increase.D.K. Joshi, Chief Economist, CRISIL
Farm Sector Growth: Real Vs Nominal
The sharp increase in support prices is a response to signs of farm distress emerging from different parts of the country, despite two good monsoons. Economists attribute this to the low nominal growth in the farm sector due to depressed prices.
In a report dated July 2, Soumya Kanti Ghosh, chief economist at State Bank of India pointed out that the GDP deflator for the farm sector has been constantly declining from 9.9 percent in FY13 to 1.1 percent in FY18. The GDP deflator is a measure of inflation used to deduce real GDP growth from nominal GDP growth.
This decline in agri-GDP deflator is an indication of distress and low level of purchasing power in rural/agriculture area. Such a decline also coincides with the inflation targeting regime introduced by RBI from FY13.Soumya Kanti Ghosh, Chief Economist, SBI
Signs of farm distress have prompted a number of states to announce farm loan waivers. Over the past twelve months or so, six states have announced loan waivers. This includes Maharashtra, Uttar Pradesh, Punjab, Tamil Nadu, Andhra Pradesh and Telangana. Total loans waived stand at over Rs 88,000 crore.
The Macro Impact
The higher MSPs will be inflationary with the price increase in paddy likely to have the largest impact. The weight on non-subsidised rice in the CPI index is at 4.4 percent. As such a 12-13 percent increase would imply an impact of between 40-50 basis points, Sajjid Chinoy, chief India economist told BloombergQuint.
UBS estimates a headline inflation impact of between 35-40 basis points from the MSP increases.
General expectation in the market was of a 40-50 basis point impact on inflation. So it is largely in line with what the bond market was pricing in. Nothing too high so that’s why you have not seen much of a reaction on the bond yields, which slipped after the announcement.Tanvee Gupta Jain, Chief India Economist, UBS Securities
The monetary policy committee in its June policy review had cited higher MSPs as a upside risk to inflation, while adding that there is still little clarity on the final pricing for the kharif season. With the pricing now announced, the MPC will likely factor in higher inflation in the second half of the year, making further rate hikes more likely.
While higher MSPs will be inflationary, they will also add to rural demand, which has already been strengthening.
In a report dated June 25, economists at HDFC Bank said “green shoots” have been visible in recent months. Sales of big ticket items like tractors, which are usually seen as a lead indicator of rural demand, have picked up. Sales of multi-purpose vans and motorcycles have also remained strong. “According to a recent study by Nielsen India, rural growth outpaced urban demand, rising by 13.5 percent in Q4 FY18,” HDFC Bank noted.