The hike in Minimum Support Price (MSP) of Ravi crops announced by the central government yesterday is unlikely to significantly impact Inflation since the hike is fairly moderate and in line with the past trend, estimated Credit Rating Agency Ind-Ra.
“At the time of kharif MSP announcement in July 2018, we had estimated its impact on inflation, which indicated a 70bp increase in retail and a 38bp increase in wholesale inflation. However, for most of the Rabi crops except safflower, the MSP increase announced yesterday is fairly moderate and in line with the past trend. Therefore, its impact on wholesale/retail inflation would be minimal. The 20.6% increase in MSP of safflower may, however, translate into a 5-6bp increase in the wholesale and retail inflation” said Indi-Ra.
The agency had also stated that the 1.5x formula may fail to work in case of Rabi as the MSP of the rabi crops except safflower was already higher than 1.5x of A2+FL cost in FY18. The MSP, announced by the government yesterday, clearly demonstrates this. Therefore, instead of sticking to the 1.5x of A2+FL formula, the government used its discretion to increase the MSP of different Rabi crops over the MSP of FY18. As a result, the MSP of all Rabi crops except safflower is higher than 1.5x of A2+FL cost for FY19. The highest return is for wheat where MSP is 2.1x of A2+FL cost, followed by rapeseed and mustard where MSP is now 1.9x of A2+FL cost. The announced MSP of safflower is now 1.5x of the A2+FL cost, lower at 1.3x of the A2+FL cost in FY18.
Ind-Ra in its commentary dated 11 July 2018, had cited the fixing of minimum support price (MSP) using 1.5x of A2+FL formula for Kharif crops will benefit farmers in FY19 as the MSP of the most important Kharif crop rice had fallen below 1.5x of A2+FL cost during FY14-FY18.