The minimum support price (MSP) is the price at which the government purchases crops directly from the farmer, regardless of the original value.
Every year, they announce the minimum price for about 20 crops. This year, the government raised the MSP considerably for Kharif crops.
It’s not surprising because the country’s heading for polls next year.
Here are four things you need to know about the current revision.
During the Union budget in February, the government announced it would buy crops from farmers at 1.5 times above the cost of production. This is the biggest increase in MSP over the past few years. The MSP for paddy - the most important Kharif crop - has been increased by Rs 200 per quintal (13%). This is much higher than the 5.4% increase last year. Other crops that received a booster dose were Ragi (52%), Jowar (43%) and Bajra (37%).
The implementation of MSP could boost rural demand. However, it has the potential to stoke inflation too. The hike in MSP could increase wholesale inflation by 38 basis points (bps) and retail inflation by 70 bps, according to India Ratings and Research. 100 bps is 1%
Rice and cotton are the two biggest agricultural commodities exported from India. The hike in MSP for these crops could increase prices in the international market, according to traders. This could dampen exports during the year. As a result, cotton traders, including multinational companies, are expected to be active in the domestic market instead.
As mentioned, the rise in MSP could increase retail inflation by 38-40 bps. This rise in inflation, in addition to the rising crude oil prices and depreciating currency, could have a negative impact on the financial arithmetic of the country. With near-term inflation expected to increase, experts believe that another rate hike by the RBI could be on the cards during the next monetary policy meeting in August. Read more about monetary policy rate hike here.
The increase in MSP is a welcome move for the crores of farmers all over the country. But at the same, it remains to be seen how this move could alter the fiscal deficit and other financial variables during the year.
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