Government increases MSP. What could be its impact on Inflation and how is this expected to be handled?

When the government increased the MSP on Kharif crops in the Union Budget to 150% of the production cost, which was the right step towards doubling of farmer incomes by 2022 as promised by the current government. However, the farmer issues refused to die down leading to a major farmer agitation in early September. With Assembly elections in Madhya Pradesh, Telangana, Rajasthan and Chhattisgarh round the corner, the Centre on announced a very steep increase in the MSP for winter-sown crops, including Rs 1,840 per quintal for wheat and Rs 4,620 for gram. Winter sown crops typically start the seeding season around September and October and continue through the winter. These Rabi crops are typically grown in the Northern states of Punjab, Haryana and Western Uttar Pradesh. These were the farmers who were up in arms against the state and were marching towards Delhi.

Approval for higher RBI MSP finally comes through

The Union Cabinet chaired by Prime Minister Narendra Modi approved the Minimum Support Price (MSP) for notified Rabi crops for 2018-19, which would give additional returns of Rs 626.35 billion to farmers. Why is this important? The additional income of Rs.63,635 crore will be instrumental in triggering a pick-up in rural demand. Remember, rural demand already accounts for more than 55% of demand for consumer durables and FMCG products in India. A sharp rise in rural incomes will have a salutary effect on demand and create a virtuous cycle of high demand and high growth in India.

Highlights of the Rabi crop MSP announcement

  • To get a clear picture of the benefit to farmers, let us compare the remuneration of farmers from Rabi crops last year with the remuneration likely this year. Here are the highlights:
  • Compared to the MSP announced last year for Rabi season 2017, the assured prices for this Rabi season 2018 has been increased by Rs 105 per quintal for wheat, Rs 845 for safflower, Rs 200 for rapeseed and mustard, Rs 30 for barley, Rs 225 for Masur and Rs 220 for gram.
  • The Union Agriculture Minister Radha Mohan Singh said that the Minimum Support Price (MSP) for wheat would provide 112 per cent profit over its production cost of Rs 866 per quintal. This should substantially increase the income levels and the profits of wheat farmers in the Northern region.
  • For barley, the Minimum Support Price (MSP) has been fixed at Rs.1,440 per quintal as against the production cost of Rs 860 per quintal. This will virtually assure a return of 67.4 per cent over the cost of production to the farmer. Even if you consider additional costs, this is still a profitable proposition.
  • In the case of gram, the cost of production is Rs 2,637 per quintal whereas the new MSP has been fixed at Rs 4,620 per quintal, giving a profit of 75.2 per cent.
  • The Minimum Support Price (MSP) for Masur has been fixed at Rs 4,475 per quintal as against the production cost of Rs 2,532 per quintal. This will result in an assured profit of 75% for the farmers.
  • For rapeseed and mustard, the MSP is Rs 4,200 per quintal as against the production cost of Rs 2,212, literally guaranteeing a return of 89.9 per cent. In the case of safflower, the cost of production is nearly Rs 3,294 per quintal whereas the MSP is Rs 4,945 per quintal, ensuring a profit of 50.1 per cent.

Finally a word of caution in the entire exercise! All these prices are fine on paper but the implementation is the key in most cases. It has been seen in the past that market prices hover way below the MSP making the mockery of the system. How the government manages this dichotomy will be critical.

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