MUMBAI (Reuters) - India has raised the price at which the government will buy new- season common rice variety from domestic farmers by 13 percent, Home Minister Rajnath Singh, as the state looks to woo millions of farmers ahead of general elections due early next year.
India, one of the world's key producers of an array of farm commodities, announces support prices for more than 20 crops each year to set a benchmark.
Prime Minister Narendra Modi's government said in its February budget that it would buy crops at 1.5 times the cost of production, a major shift after keeping the so-called minimum support price in low single digits over the past three years.
Analysts and economists have warned the move could help push up inflation, add to the fiscal deficit and prompt India's central bank to raise interest rates more steeply than expected.
COMMENTARY
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"The median hike from the minimum support prices (MSPs) 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. MSP hike is broadly along expected lines, and as such, may not accentuate concerns for the Reserve Bank of India on this account.
"However, a larger concern emanates from continued elevated prices of crude oil. We maintain a risk of one more hike of 25 bps by October. We don't see any material risk on fiscal as the impact is at a manageable level of 0.1 percent of GDP. In every preceding election year the MSP hikes have been high, like it was 40 percent in 2009, 27 percent in 2013 and 25 percent in 2018. This will help in boosting farmer income and potentially offset the adverse impact of high oil prices on growth."
A PRASANNA, CHIEF ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
"The newly announced minimum support prices for Kharif crops mark a steep rise in prices. We estimate that the rise in support prices of cereals and pulses in FY 2019 will be nearly 25 percent, equivalent to the cumulative increase seen over the last five years. On a CPI-weighted basis, the increase amounts to 90 basis points, and we thus, expect at least 50 bps upside risk to forward-looking inflation estimate. Should the government rely on large-scale procurement of crops to implement these prices, then the fiscal cost could be around 0.3 percent of GDP, which will likely be shared by the central and state governments.
"As far as monetary policy is concerned, we expect the MPC to take note of the upside risk due to direct impact of higher MSPs, fiscal cost and second round effects. In tandem with further rise in oil prices and rupee depreciation since the June policy this development should cement the case for another hike. We continue to expect that hike to be delivered in the October meeting."
(Reporting by Suvashree Dey Choudhury in Mumbai, Editing by Sherry Jacob-Phillips)
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