India's political economy of minimum support prices

Ms. Radhika Rao, India Economist, DBS Bank

Key Highlights -

- The political economy of providing a floor to the price of key foodgrains has long distorted India's food inflation dynamic. After a few years of policy restraint, 2018 may turn out be a year when Minimum Support Price (MSP) hikes add to inflation.

- The budget proposal to increase Minimum Support Prices (MSPs) to 50% above the production costs in FY19, in a bid to boost farm incomes and address larger discontent amongst the agricultural community ahead of key state elections, will complicate the inflation picture.

- Some agriculture products are already priced at more than 50% above cost, so the measure will not have an across-the-board inflationary impact. Still, both inflation and inflation expectations have upside forthcoming.

- Severity of this year's inflationary impact also hinges on rural wage growth and procurement.

- If MSP increases are accompanied by sticky inflation beyond June, compounded by high oil prices and heightened market volatility (INR weakness), risks are that RBI policy rate hikes might be frontloaded to 2Q-3Q FY19 (from our current call of 4Q).

Source : Equity Bulls

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