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Union Budget 2018: Increase in MSP may lead to spike in food prices

A spike in inflation could prompt the Reserve Bank of India, which in its December monetary policy review kept key interest rates unchanged citing inflation risks, to consider tightening policy.

india Updated: Feb 02, 2018 01:27 IST
Union Budget 2018-19,MSP,Minumum support price
Food inflation may accelerate in June-July, when government agencies procure farm produce for sale through the subsidised public distribution system.

Higher procurement prices for farm commodities that finance minister Arun Jaitley promised in the union budget are set to fuel food price inflation in the 2018-19 procurement season.

Jaitley, however, sought to downplay the inflationary impact of the measure, aimed at reducing rural distress.

Food inflation may accelerate in June-July, when government agencies procure farm produce for sale through the subsidised public distribution system, experts said, adding its impact on overall consumer price inflation would be less pronounced.

A spike in inflation could prompt the Reserve Bank of India, which in its December monetary policy review kept key interest rates unchanged citing inflation risks, to consider tightening policy.

To give remunerative prices to farmers hit by falling prices after a bumper crop, Jaitley said the government will offer a minimum support price (MSP) that’s 50% above the cost of production of remaining rabi (winter) crops as well as kharif (summer) crops. At present, 23 crops are backed by MSP although only some of them, such as rice and wheat, are efficiently procured.

“I am confident that this historic decision will prove an important step towards doubling the income of our farmers,” the finance minister said.

Jaitley also proposed to raise food subsidy by 21% or ~29,041 crore to ~1.69 trillion for 2018-19. While the fertilizer subsidy was raised marginally in the next fiscal year from the revised estimate for the current year, the petroleum subsidy estimate has been kept unchanged at over ~24,000 crore.

NR Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the decision to widen the ambit of MSP will have an inflationary effect on food prices and a partial effect on retail inflation. “That, however, will not result in a deviation from the inflation target range of 2-6%,” said Bhanumurthy.

Jaitley downplayed the potential impact on inflation. “We don’t see any serious impact on inflation with these measures. There’s nothing in the budget that will make prices go up.”

First Published: Feb 02, 2018 00:57 IST