Effects of MSP hike on Indian Economy


Why should you read this topic?

Assuming that you are preparing for bank recruitment tests, you should realize that there is a section on General Awareness that tests if you are aware of the happening around you. The happening on Economy, Sports, Industry, Trade and Policies. Who would assume that you will be a prospective bank hire without knowing the fundamentals of General Awareness? So, it is high time that you started taking the GK-in-Depth articles, the Daily GK and the Weekly GK diligently. You are shown the resources, it is on you to utilize them. And, if you are planning to take MBA tests like CAT, FMS, XLRI, NMAT, even then the General Awareness plays a significant role in the Group Activity and interview rounds.

Factors that led to hike in the Minimum Selling Price...

The crucial factors that led the NDA government to hike the MSP are many and are complex. Consider a few of them...

  • The agri-GDP has been rising just 2.4% per annum in the NDA’s first four years.
  • The lack of progress in reforming agriculture markets—to allow farmers to get a higher share of retail prices.

The impact of the Minimum Selling Price...

The hikes envisaged range from a high 12.9% for rice to 28.1% in the case of cotton and 52.5% in the case of ragi. The exact impact is difficult to judge as it depends upon how effective the MSP are. In the past, hiking MSP really helped farmers in only a few states like Punjab, Haryana, Madhya Pradesh and Chhattisgarh and, in the rest, prices of most crops remained far below the announced MSP.

This time around, the government has promised things will be different. The government has promised it will try and procure a lot more than last year. The second part of the MSP plan, where the government has promised it will pay the difference between market prices and MSP if it cannot procure, has not yet been announced because funding it is very expensive and the system can be rigged in a big way.

Minimum Selling Price and the inflation...

Assuming the government is able to keep its promise, economists are factoring in a 60-70 bps hike in CPI inflation, or around half that in FY19, given it will come into play after half the year is over. With other pressure points like oil and a weak rupee, that is worrying as RBI will keep hiking rates if inflation looks like it is out of control.

Due to the rise in MSP, the government would have to bear expenses of about 330 billion rupees ($4.81 billion). It contributes not more than 0.2 pct-0.3 pct of the GDP. Hence, it is everyone's bet to gauge the impact of Minimum Selling Price on inflation. Some of the items that have seen the biggest increases in MSP for the ongoing kharif season, such as jowar, bajra, ragi and moong, have a small weight in the WPI and CPI indices. This may help to contain the inflationary impact, if higher MSP translate to higher market prices.

The median hike from the MSP is 25 percent compared with 3-4 percent in the last three years. The impact from these MSP hikes will be 35 basis points to headline inflation in the current fiscal year, and another 35 bps in the next. The MSP hike is broadly along expected lines, and may not accentuate concerns for the RBI on this account.

Cotton, Rice, MSP and India's exports...

More worrying, however, is the impact this will have on India’s exports and people employed in the sector. The biggest problem area is cotton where, after the MSP hike, Indian prices will be 24-25% higher than global ones. Given that two-thirds of all fibre used in India, for local use as well as exports, is cotton, this will impact not just exports of cotton fibre but also cotton-based textiles and ready-made garments—how much is difficult to say, but FY18 exports of these items were over $19 billion. In the case of rice, the 12.9% hike in MSP also makes Indian rice a bit more expensive than that from Vietnam, so some part of the $7.8 billion FY18 exports will take a hit.

Will MSP hike lead to rising rural income?

If farmers do get the benefit of the MSP hike, then the NBFC and automobile sectors would benefit due to rural income rising. Over the years, MSP has been revised by the government, but the quoted price might not have reached the farmers. So it's a wait-and-watch situation. One would only come to know if the farmers are actually getting it in the month of October 2018.





Also Read: Indian Rupee, Rising Crude and CAD

Read 356 times Last modified on Monday, 09 July 2018 11:28
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