In an attempt to woo farmers to plant more and increase their profitability, the government unveiled its recent populist measure by hiking the minimum support price (MSP) of kharif or summer crops for 2012-13 (October-September) season in the range of 16% to 53%. However, the move is likely to have serious implications, as on one hand it would stoke up inflationary pressure on the economy while on the other increase the food subsidy bill, which is already hovering around Rs 75,000 crore.
At a time when input costs are rising, the Cabinet Committee on Economic Affairs’s (CCEA) decision to hike MSPs of major crops would provide some relief to farmers as it would not only compensate them for higher input costs but also increase their profitability. However, government’s decision seems to be ill-timed as the headline inflation has resumed its skyward journey and is hovering at 7.55% which is way above the Reserve Bank of India’s comfort zone.
The rise in MSPs will further augment structural uptrend in food price inflation, which in turn would underpin headline inflation and complicate matters for monetary policy. An increase in the floor prices of oilseeds and pulses is also likely to burn holes in the pockets of consumers. However, some experts also believe that this move will have little impact on inflation as the market prices of most of the commodities are already more than the new MSPs.
The total food subsidy deficit at the end of the current year is forecasted to reach Rs 40,000 crore with increased MSP on paddy which is substantially higher than Rs 31,750 crore under-provisioning of food subsidy expected earlier in the current year. This is likely to exert added pressure on the food subsidy burden of the government.
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