Prime Minister Narendra Modi's much-talked-about promise of doubling minimum support prices (MSP) is still far from the price hike that farmers need, said a report by Japanese brokerage firm Nomura, which also warned that even at this low level, it will spawn inflation risks.
Noting that any MSP hike is inflationary, the report said, "the proposed hike still leaves the MSPs far from maximum and are thus less populist than they appear."
The proposal is being interpreted as highly populist as it is based on the comprehensive cost of production, moving beyond the 'A2+FL' cost measure.
While the A2+FL formula counts the actual cost plus imputed value of family labour in producing a crop, the 'C2' formula factors in a lot more cost, including imputed rent on land and interest on capital, making cost much higher than what the Commission for Agricultural Costs & Prices bases its pricing formulae on.
"Mapping the prime minister's statement to the various cost classifications, we find that it reaffirms that A2+FL will be used as an input cost benchmark and not the comprehensive cost measure C2, which would have been significantly inflationary,” the report said.
“But even the use of A2+FL will still mean a doubling of the kharif MSP in financial year 2019, which is an upside risk to inflation, though the final decision will be known only by May or June. So, the announced MSP are still far from maximum and that the prime minister’s weekend sound bites are less populist than they appear,” it added.
The Budget had announced that MSPs for the summer crops would be at 1.5 times the production cost, leading to some confusion given the plethora of cost definitions used. The proposal was unclear whether the definition used would be A2+FL or C2, with the latter being a more comprehensive measure and thus more inflationary, it noted.
For instance, MSPs for the summer crop will be about 35 percent higher on the C2 cost measure than the A2+FL measure. But on Feb. 9, the finance minister told the Parliament that the A2+FL costs would be used.
Stating that any MSP hike is still an inflationary risk, the report said "our earlier estimates, based on the use of A2+FL as input cost, showed summer crop MSPs rising 12.9 percent in financial year 2019 from a 6 percent rise in the ongoing financial year, and winter crop MSP rising by 6.6 percent from 7.4 percent.”
We estimated that this would add around 60 basis points to consumer price inflation over the next two-four quarters, while the fiscal impact should be relatively muted at less than 0.1 percent of GDP, shared between the Centre and the states.Nomura Report
“The RBI has also identified the new MSP policy as a key inflation risk and is likely to reiterate this view in its April 5 policy review. However, we believe it is too early to warrant a shift in rates or policy stance as the final decision on MSPs will be known in May or June,” it said.