Stepper MSP is likely to increase as farm input costs increase

The increase in farm input costs is likely to force the government to announce higher-than-usual increase in benchmark prices for summer crops for the grain year starting July, sources told FE.

Any such move could increase spending on welfare programs and increase potential price pressures, putting both the government and the central bank in a difficult position as they take steps to extinguish inflation in the wake of the Ukraine crisis.

In 2021-22, the government increased the Minimum Support Price (MSPs) of more than a dozen kharif crops by only 1-7% over a year earlier (see chart). This time increase could be even more significant, if not widespread, as the government seeks a middle ground to balance producers’ interests with consumers, sources said.

A senior finance ministry official acknowledged that rising input costs were “of course a concern” and could eventually raise food subsidy bills. If the cost of farm production increases, then MSP may be increased accordingly.

There is also a concern that rising wheat prices, which have forced the government to shorten its MSP-based procurement program and impose restrictions on its exports, may also affect rice price movements over time. Adequate stock. As such, the government on Saturday replaced a portion of the promised wheat supply with rice under the Food Security Act. Thus, if the MSP is not increased in line with the market realities, the official rice procurement in 2022-23 may also sink.

The latest move by the government to extend the free grain supply till September has estimated that the FY23 budget food subsidy will cost Rs 2.06 trillion. Any decision to extend it further would be costly enough.

The Commission for Agricultural Costs and Prices (CACP), which recommends MSPs for various crops to the government, cites the reasons for the so-called A2 + FL costs, among others. ‘A2’ generally covers all paid expenses (both in cash and type) directly to the farmer for seeds, fertilizers, pesticides, rented labor, leased land, fuel, irrigation, etc. ‘A2 + FL’ refers to A2 cost, also an alleged cost of unpaid family labor. Most of the costs are out of government control.

Irrigation costs continue to rise in the face of high diesel prices. Prices of pesticides and seeds have already started rising. Analysts expect rural wages, which were slightly lower in the last fiscal year, to rise again this year.

The government has decided to exploit a significant portion of the fertilizer price hike (expecting the FY23 fertilizer subsidy to rise by at least Rs 1 trillion from the budget level of Rs 1.05 trillion, while some analysts see the bill as more. As 2.5 trillion) However, last month, the largest Fertilizer seller IFFCO (regulated) has announced a 58% increase in the price of non-urea fertilizer.

The government has borne the brunt of the rise in prices of phosphatic and potassium (P&K) fertilizers by increasing the rate of Nutrition-Based Subsidy (NBS) in 2021-22 and Kharif season (April-September, 2022). Increasing subsidies means protecting farmers from rising prices of di-ammonium phosphate and other non-urea nutrients in the global market. These soil nutrients are mainly imported.

The retail price of P&K fertilizer, including DAP, was ‘regulated’ in 2010 with the introduction of a ‘fixed-subsidy’ system as part of the NBS process. However, DAP subsidies have increased spending by 60% on FY22, up from a little over 30% previously.

According to official data, the price of imported urea rose by more than 145% to 9 930 per tonne in April 2022 from 3 380 a tonne a year ago.

After announcing a dramatic increase in MSP in 2018, the government has decided on a moderate increase to ensure that farmers can get up to 50% of the cost paid. In 2018, the year the cost-linked rule was introduced, some crop growth was between 50% and 97%.

Although an improved MSP, supported by purchasing power, could potentially boost rural incomes and purchasing power, they could also increase potential inflationary pressures.

Aditi Nair, chief economist at ICRA, said: “High MSP can be ensured due to increase in various input costs. This will increase the cost of government to procure widely procured items like wheat and rice. However, the potential for higher wheat exports could have some effect. ”

DK Pant, chief economist at India Ratings, said: “Higher input prices will increase production costs, which may be reflected in higher MSPs.” In the last amendment, the MSP of wheat was increased by only 2% but since then the price of input has increased significantly. “A sharp rise in MSP for rice will have an adverse effect on both the financial side (subsidies) and inflation,” Pant added.

Retail inflation hit a 95-month high of 7.79% in April and food price pressures hit a 17-month high of 8.38%. Primary food inflation, at the wholesale level, increased to 4.1% in the last fiscal year from 3.2% in the previous year.