After government said that it will provide 1.5 times the MSP on cost of production of crops in the 2018-19 Union budget, RBI re-assessed the impact of MSP on inflation
The Minimum Support Price (MSP) and India’s flagship rural employment generation scheme Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) recently came under attack after the central bank released calculations on inflation and the agrarian labour crisis.
The Reserve Bank of India’s annual report says that that the MSP of crops has a major impact on inflation and that MGNREGA created labour shortage in agriculture.
In its annual report (2017-18), RBI re-assessed the impact of MSP on inflation after government said that it will provide 1.5 times the MSP, a debatable figure, on cost of production of crops in the 2018-19 Union budget.
The government announces MSP for 23 major crops prior to their sowing seasons to ensure guaranteed prices to farmers and protection from price fluctuations and market imperfections. Of these 23 items, RBI took into account 16 major crops.
The report points out that although agriculture and allied activities provide a solid foundation to the economy, producers are still at peril.
Successive years of bumper production of food grains and horticulture crops on the back of reasonably good monsoons have not, however, translated adequately into a boost in farm and rural incomes.
RBI found that there is a clear impact on inflation due to MSP. It also states that the impact gets stronger as government assures procurement.
But when wheat and paddy were removed from list of 16 crops, the only crops for which procurement is guaranteed, the impact on inflation was minor.
The calculation clearly shows that adequate procurement is the channel through which higher MSP may push up the food inflation trajectory.
The report also said that international price contribute to inflation of edible oils.
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