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'Higher MSP may have inflation, fiscal costs'

Monday, July 09, 2018

Government's decision to hike MSP for kharif crops is expected to impact GDP by 0.1-0.2% besides adding to inflationary pressures, says a DBS report.

According to the global financial services major, higher MSPs carry inflation as well as fiscal costs.

"For the fiscal math, impact is likely to be in the tune of 0.1-0.2% of GDP, which might necessitate higher revenue support or lower capex spending to limit any risk to the 2018-19 deficit targets," DBS said in a research report.

Seeking to address farm distress ahead of general elections, the Centre on July 4 hiked price paid to farmers for paddy by a record Rs 200 per quintal and by up to 52% for other summer-sown crops.

The move is expected to lead to higher inflation and widen fiscal deficit because of increase in food subsidy bill to over Rs 2 lakh crore from Rs 1.70 lakh crore provided in the Budget for 2018-19, experts said.

As per the report, for the rest of this financial year, the impact on inflation will be in the range of around 25-30 bps.

Regarding RBI's policy stance, the report said higher MSPs will add to inflationary pressures, fiscal slippage and this might prompt the central bank to go for another rate hike.

"For RBI, MSP increase poses an additional risk to their inflation view, besides fiscal slippage worries and higher oil prices," the report said adding "August rate hike risks remain on the table".

MSP hike to boost farm income, spur growth: Assocham
The government's decision to hike the minimum support price (MSP) for 14 khariff crops would boost farmers' income, resulting in a huge rural demand push to the Indian economy, industry body Assocham said.

Last week, the BJP-led government increased the MSP for paddy by a record Rs 200 per quintal that will cost the exchequer over Rs 15,000 crore, and help fulfil its poll promise to give farmers 50% more than their cost of production.

"The MSP may not be an ideal and a perfect solution to address the farmers' woes, but the long term reforms would take long time and our farmers cannot be allowed to suffer that long.

"The entire rural landscape constitutes about 70% of our consumer basket and unless they have adequate purchasing power, the much-needed demand push for India Inc would not materialise," Assocham Secretary General D S Rawat said in a statement.

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