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Support prices fuelling inflation?

india Updated: Feb 27, 2013 21:52 IST
HT Correspondent
HT Correspondent
Hindustan Times
Economic Survey

India's food output is growing twice as fast as its population, but outdated policies have kept prices high, the Economic Survey said.

The report suggested, for the first time, that the government should look at ways of boosting food production through "measures other than price supports". This opens up the possibility of a gradual withdrawal of a critical government support in the future - support prices. Nearly two-thirds of Indians depend on farm income.

The "minimum support price" (MSP) is the guaranteed price the government offers to all farmers. MSPs have been substantially raised over the last few years. Higher MSPs boost farm income and encourage farmers to grow more because they get a guaranteed price but they fuel inflation," it said.

For instance, higher MSP for wheat has helped in record production, but at the expense of vegetables and pulses, whose shortage has driven inflation.

An RBI study has found that a 10% MSP hike raises short-term wholesale inflation by 1 percentage point. "Policy on price and procurement supports should be calibrated so as to not encourage more production of crops that are already abundantly supplied," the report said.

For a government set to roll out a right-to-food law, the report broke some good news: production has been robust, although growth targets have not been fully met. India's farm sector grew 3.6% in the last five years, the report said.