There will be "minimal" impact on inflation from the government's decision to fix support prices for the upcoming Kharif crops like paddy at least 50 per cent higher than the cost of production, an SBI research report said today.
In his Budget Speech on February 1, Finance Minister Arun Jaitley had said that the Niti Aayog, in consultation with the Centre and state governments, will put in place a fool- proof mechanism so that farmers will get adequate price for their produce.
He had announced that the Minimum Support Price (MSP) for all Kharif crops would be fixed at least one-and-half times of their production cost.
The MSP of majority of rabi crops has been announced at least one-and-half times the cost involved, he added.
"Now, whether such a price fixation will impact inflation or not. We believe the impact on inflation will be minimal," said the SBI Ecowrap report.
It added that early implementation of the 1.5-times MSP scheme along with the price compensation support and several other innovative schemes for the rural sector will pave the way for a transformational change in rural economy going forward.
Presently, Commission for Agricultural Costs and Prices (CACP) gives three definitions of production costs: A2, A2+FL and C2, the report said.
A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others.
A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour.
C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.
"We believe that the recent debate in public domain of whether the MSP is fixed over the production costs A2+FL and C2 is meaningless as long as the government compensates the farmer over and above the prevailing gap between the market price and MSP of that particular crop," it said.
Disclaimer: No Business Standard Journalist was involved in creation of this content
