July MSP hike well below old schemes: RBI

29- 35 bps increase in headline inflation from the hike in support prices

Mumbai, Oct. 7: The hike in minimum support prices ( MSP) for kharif crop announced in July by the Narendra Modi government was “well below” the ones effected under the previous UPA governments in 2008- 09 and 201213, the RBI has said.

The government had announced the hike in MSPs in July for the summer or the kharif crop, following a budget announcement affirming a 50 per cent mark up to farmers over the cost of produce.

MSP on common variety of rice was hiked by ` 200, along with other crops like cotton, and pulses like tur and urad.

It followed it up by declaring a hike for the winter crop as well last week. This included an increase of ` 105 per quintal for wheat, and masur by ` 225 per quintal, among others.

“In a historical perspective, the current increase in MSPs ( announced in July) is significantly higher than the average of the last five years but well below the upward revisions effected in 2008- 09 and 2012- 13,” the RBI said in the Monetary Policy Report.

The MPR said the hike for the 14 crops for the kharif 2018- 19 season implies a nominal MSP increase in the range of 3.7 per cent to 52.5 per cent for different crops as compared to their levels last year.

The MPR, however, did not elaborate on the assertion beyond a visual chart depicting the MSP hikes for different commodities for multiple years.

It, however, said that the present MSP hike can lead to a 0.29- 0.35 per cent hike in headline inflation, the RBI’s core mandate.

“A first approximation of the inflationary impact of MSP increase... yields 29- 35 bps increase in headline inflation,” the MPR said, adding that the estimate is based on multiple methodologies.

It, however, added that the estimates are “highly tentative” in the absence of “robust information on the actual size and scale of procurement operations”.

In its resolution for the fourth bi- monthly policy review announced Friday, the Monetary Policy Committee said an estimate of the impact of increase in MSPs has been factored in the baseline inflation projections.

In a historical perspective, the current increase in MSPs ( announced in July) is significantly higher than the average of the last five years but well below the upward revisions effected in 2008- 09 and 2012- 13. — RESERVE BANK