MSP and Inflation -2

All the inquisitive minds must be rendering for the reason behind MSP hike at this stage. Due to impositions of CAATSA rule and walk out from IRAN Nuclear Deal, oil prices are going to rise. Then why such a frivolous act? To be taken in account, the decision is tented politically too. Before every election MSP was hiked. in 2009 there was 40% hike, in 2013 27% and now ostensibly 25–50%. To gain support of servicemen in the second largest economic sector, the flute is played.

We should keep in mind, direct impact of inflation won’t be observed now. With the passage of time, after monsoon ends result will be known. With positive inflation, farmers too want security of their work. But since MSP rise is governed by government. In a way, overheads are going to be paid by citizens themselves. With rise in price of oil, current fiscal and account deficit is also increasing. India will face an impact equivalent to, 0.04% and 0.09% of GDP. Fiscal deficit occurs when “imports are more than exports”, implying revenue earned is less than expenditure.

Money supply and Inflation

Here we need to keep in mind for importing, the amount paid to other country is in their currency. So foreign reserves(FOREX) comes in account. When ever we go for exchanging currency, we are actually buying foreign currency from our currency e.g if we want a 1$ note(USD), we will be giving 65INR. thus we are buying our currency. in similar way when government has to make international financial transactions, Forex reserves are used. “ A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.” Currently since the reverse is happening, the value of our currency is depreciating.

If We get good crop this year, then farmers can get price above MSP. But if procured price is less than MSP due to reasons unavoidable. The difference will be paid by the government, which will lead to more deficit. Government has decided to double farm income by 2022. As a step along with farm waiver, MSP hike will lead to inflation. In near future we should be prepared for price hike by RBI.



Analyst at Caterpillar Inc.

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