MSP and Inflation- 1

With government’s decision to increase MSP, there’s a surge in market of conundrums. Will it affect inflation, is the biggest question? So, what is MSP?MSP is minimum support price. It is security for farmers to prevent them from loss. The decided MSP will be given to farmers in case the amount is not compensated. Due to MSP, farmers are under government obligation if the price they want is not achieved/reached due to either market conditions or natural condition. Market condition is when prices fall due to surplus supply. Prices are decided by simple “Demand and Supply” Theory. Natural conditions are excessive/scarce rain, epidemic outflow. Due to any ACT OF GOD, if crop fails then to prevent farmers from loss, MSP is provided.

MSP is implemented on A2+FL price which includes basic cost of cultivation(equipment cost, cost of seeds, fertilizers, pesticides). Though it should also include rental prices of land. Inclusion of land rental value(C2) is not done since 88% farmers don’t incur it. The government notifies MSP for 23 commodities and FRP (fair and remunerative price) for sugarcane. These crops cover about 84% of total area under cultivation in all the seasons of a year. About 5% area is under fodder crops which are not amenable for MSP-type intervention. Thus, the present list of MSP crops covers close to 90% of the cultivated area. The system of MSP, if implemented fully, will leave only a very small segment of producers without price benefit. Currently 50% margin is targeted, but even after increasing 14.5%, there’s road to travel.

To achive target, government has to increase liquidity in market. Current forex is reduced by 593millionUSD. In the dearth of money in bank, to increase MSP or any type of increase in subsidy will affect the stockpile. The solution to it is, increasing repo rate. Repo rate is intended to icreased by, 25–70 basis point. With increase in repo rate, we can see inflation in prices of crops. Most of the cereals will be affected by 4.7% to 5%. Thus inflation will still be above the target of 4%.



Analyst at Caterpillar Inc.

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