2/08/2018
Non-perishable agri products may see slight price rise till MSPs come into effect
The announcement of a Minimum Support Price (MSP) of 1.5 times the
farmer’s cost will likely not have a strong upward impact on overall
inflation but could spur a waning of the sharp slowdown in food price
gains seen in 2017, according to officials and economists.
In the short term, a slight increase in prices of non-perishable farm products is possible as producers hold on to produce till the higher MSPs come into effect around September or October. The increase in MSPs would come into effect when the Kharif crop came into the market, Economic Affairs Secretary Subhash Chandra Garg had told The Hindu, adding he did not expect any impact in the first six months. However, there was the possibility of an induced effect as farmers held stocks in expectation of a higher price, he said.
Price expectations
Farmers would hold on to crops only if current prices were lower than 1.5 times the cost of production, economists said, adding that the inflationary impact of higher MSPs would be felt only if food prices fall fell below that level. “If prices are currently depressed and we know that in the future it will be 1.5 times the cost, then the prices may start going up right now,” said Ranen Banerjee, partner and leader - Public Finance and Economics at PwC India. “The non-perishable products, and those that can be stored, will be held till that time.”
Food inflation decelerated in 2017 at both the wholesale and retail levels. The ‘food and beverages’ category of the Consumer Price Index went from a strong growth of 7.2% in May 2016 to a contraction of 0.2% in May 2017. Similarly, the food part of the primary articles segment of the Wholesale Price Index went from a growth of 6.82% to a contraction of 2.13% over the same period. These plummeting prices due to excess supply had hurt farmers, forcing the government to act.
The nature of MSPs and the fact that government has limited funds to use to buy crops at that price, would contain inflationary expectations, said D.K. Srivastava, Chief Policy Advisor at EY India.
“MSPs don’t come into effect until market prices dip. And even if they dip, government’s ability to purchase at MSP is based on budget allocation. Currently, only limited purchases are done due to budget and quality considerations. If all the crops were to be bought, then the budgetary allocation would have to be much higher,” he said.
Mr. Banerjee added that due to this nature of MSPs, that they kick in only when market prices dip, the upward effect on inflation may be limited, but now even the sharp downward trend seen in the middle of 2017 will no longer take place.
“It is not necessarily going to have a higher inflationary effect,” Mr. Banerjee said. “But yes, there won’t be a sharp downward movement or drop in prices.”
In the short term, a slight increase in prices of non-perishable farm products is possible as producers hold on to produce till the higher MSPs come into effect around September or October. The increase in MSPs would come into effect when the Kharif crop came into the market, Economic Affairs Secretary Subhash Chandra Garg had told The Hindu, adding he did not expect any impact in the first six months. However, there was the possibility of an induced effect as farmers held stocks in expectation of a higher price, he said.
Price expectations
Farmers would hold on to crops only if current prices were lower than 1.5 times the cost of production, economists said, adding that the inflationary impact of higher MSPs would be felt only if food prices fall fell below that level. “If prices are currently depressed and we know that in the future it will be 1.5 times the cost, then the prices may start going up right now,” said Ranen Banerjee, partner and leader - Public Finance and Economics at PwC India. “The non-perishable products, and those that can be stored, will be held till that time.”
Food inflation decelerated in 2017 at both the wholesale and retail levels. The ‘food and beverages’ category of the Consumer Price Index went from a strong growth of 7.2% in May 2016 to a contraction of 0.2% in May 2017. Similarly, the food part of the primary articles segment of the Wholesale Price Index went from a growth of 6.82% to a contraction of 2.13% over the same period. These plummeting prices due to excess supply had hurt farmers, forcing the government to act.
The nature of MSPs and the fact that government has limited funds to use to buy crops at that price, would contain inflationary expectations, said D.K. Srivastava, Chief Policy Advisor at EY India.
“MSPs don’t come into effect until market prices dip. And even if they dip, government’s ability to purchase at MSP is based on budget allocation. Currently, only limited purchases are done due to budget and quality considerations. If all the crops were to be bought, then the budgetary allocation would have to be much higher,” he said.
Mr. Banerjee added that due to this nature of MSPs, that they kick in only when market prices dip, the upward effect on inflation may be limited, but now even the sharp downward trend seen in the middle of 2017 will no longer take place.
“It is not necessarily going to have a higher inflationary effect,” Mr. Banerjee said. “But yes, there won’t be a sharp downward movement or drop in prices.”
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