“This means that in case of any shortfall in production of any crop, prices can increase at a faster rate and add to inflation,” said Madan Sabnavis, chief economist at Bank of Baroda (BoB). “The crux will hence be the size of the crops this season.”
The government on Wednesday announced an increase in MSP across cereals, pulses, oilseeds and cotton.
While the increases ranging from 5% to 11% are higher than the 4-6% range anticipated, economists said any impact on inflation will depend on market dynamics.
“The actual impact of the MSP hike would depend on the procurement strategy of the government as well as the ruling market prices of various crops vis-a-vis the revised MSPs,” said Soumya Kanti Ghosh, group chief economic advisor at State Bank of India (SBI).
Sabnavis of BoB believes that MSPs will be one of the factors that will be considered when the Reserve Bank of India (RBI) takes a call on rates at its ongoing Monetary Policy Committee (MPC) meeting ending on Thursday. He believes that the MSP announcement will likely prolong the rate pause.OECD in its Economic Outlook released on Wednesday projected that rates would start declining from mid-2024.While food inflation had fallen to 3.8% in April, individual commodities remain a concern.
“Inflation is already high at 11% and, hence, there is potential for prices to go up further if the crop is not higher than last year,” Sabnavis said.