But, it had noted that “the impact of the revision in the MSP formula for kharif crops is not possible to assess at this stage in the absence of adequate details.”
“The announcement of higher MSPs itself would have an upward push to inflation since the monetary expectations of farmers for their harvest are now raised. We might see this upward climb of CPI inflation even before the harvest season kicks in,” says Himanshu, associate professor of economics at Jawaharlal Nehru University.
Some economists believe that the rise in CPI could force the monetary policy committee to raise rates in its next meeting.
“The inflation trajectory in the near term would remain upwardly biased and hence at least one more rate hike by the regulator is likely, more so in October 2018, though a rate hike in August 2018 cannot be entirely ruled out,” noted Ind-Ra.
On the other hand, it is difficult to gauge the impact of the hike in MSP on government finances because of lack of clarity over what may end up being procured.
Home Minister Rajnath Singh said that the decision could cost the government roughly Rs 150 billion.
But according to government sources this estimate is based only on procurement of paddy and does not factor in procurement costs for other crops, which are likely to be around Rs 220-250 billion.
But in the absence of data on what the government plans to procure, it is difficult to know for sure.
“The actual costs will depend on the level of procurement. Barring rice and wheat, procurement of other crops is carried out only in a very few select areas, where the state government takes the initiative,” says Abhijeet Sen, former member of the Planning Commission.
A senior official of the Food Corporation of India told Business Standard that “the state governments can get central government assistance if the coarse grains they procure are distributed under the National Food Security Act.”
“Assuming the procurement of mandi prices for most crops are below their announced MSPs,” he adds.
According to Shubhada Rao, group president and chief economist, YES Bank, “The fiscal impact of MSP recalibration is estimated at around Rs 150 billion to Rs 200 billion (0.1 per cent of gross domestic product), premised on government procurement growing by 1 per cent in 2018-19, on the back of expectations of normal monsoon.”
Rao does not see a risk to 2018-19 fiscal deficit target, as “it appears that the government has made adequate provisions in the Union Budget.”
However, others are not so sure.
“Without additional details on whether the procurement of crops would be widened from the current set, or if some other mechanism would be adopted to ensure that farmers receive prices on a with MSPs for their produce, it remains difficult to ascertain the impact of higher MSPs on inflation and the fiscal deficit,” says Aditi Nayar, principal economist at Icra.