INDIAN ECONOMY: MSP at 1.5x of cost – What does it mean for inflation?

“…Government has been very much sensitive to this resolutions and it has declared Minimum support price (MSP) for the majority of rabi crops at least at one and a half times the cost involved. Now, we have decided to implement this resolution as a principle for the rest of crops. I am pleased to announce that as per pre-determined principle, Government has decided to keep MSP for the all unannounced crops of kharif at least at one and half times of their production cost…”, Union Budget 2018-19 Speech

 

There are two important things to note in the excerpt mentioned above. First, Mr Jaitley informs us that MSP for the majority of rabi crops are already >=1.5x of the cost. And secondly, the MSPs for the unaccounted crops will be kept at >=1.5x of the cost of production.

 

The table below compares the MSP for various kharif and Rabi crops. Confirming the first point in the speech commentary, most of the rabi crops are >=1.5x of A2 and (A2+FL) cost; however, MSPs are much lower than C2 (the most comprehensive measure of cost). Thus, it is confirmed that the government is either talking about A2 or A2+FL. C2 is certainly out of the question.

 

Coming to the second point in the speech commentary, most (11 out of 14) crops already have MSP >=1.5x of cost, as per A2, but only 3 crops (of 14) have MSP >=1.5x under A2+FL cost.

 

The inflationary impact of this announcement would depend on whether the government considers A2 or A2+FL cost or production. The former implies (simple) average of ~6% in MSPs for 2018-19 kharifseason, the latter implies ~20% hike in MSPs. It is also unclear if the government wants to meet the 1.5x target by end-FY19 or end-FY20.

 

Exhibit: MSP versus cost of production for various Kharif/rabi crops

	Cost of production (INR/quintal)				MSP over cost measures (%)
	A2	A2 + FL	C2	MSP	A2	A2 + FL	C2
Kharif crops
Paddy	840	1,117	1,484	1,550	84.5	38.8	4.4
Jowar	1,214	1,556	2,089	1,725	42.1	10.9	(17.4)
Bajra	571	949	1,278	1,425	149.6	50.2	11.5
Maize	761	1,044	1,396	1,425	87.3	36.5	2.1
Ragi	1,384	1,861	2,351	1,900	37.3	2.1	(19.2)
Arhar (Tur)	2,463	3,318	4,612	5,450	121.3	64.3	18.2
Moong	2,809	4,286	5,700	5,575	98.5	30.1	(2.2)
Urad	2,393	3,265	4,517	5,400	125.7	65.4	19.5
Groundnut	2,546	3,159	4,089	4,450	74.8	40.9	8.8
Soybean	1,787	2,121	2,921	3,050	70.7	43.8	4.4
Sunflower	2,933	3,481	4,526	4,100	39.8	17.8	(9.4)
Sesamum	2,685	4,067	5,706	5,300	97.4	30.3	(7.1)
Nigerseed	1,788	3,912	5,108	4,050	126.5	3.5	(20.7)
Cotton	2,622	3,276	4,376	4,020	53.3	22.7	(8.1)
Rabi crops
Wheat	642	817	1,256	1,735	170.2	112.4	38.1
Barley	522	845	1,190	1,410	170.1	66.9	18.5
Gram	1,977	2,461	3,526	4,400	122.6	78.8	24.8
Lentil	1,845	2,366	3,727	4,250	130.4	79.6	14.0
Rapeseed & mustard	1,354	2,123	3,086	4,000	195.4	88.4	29.6
Safflower	2,216	3,125	3,979	4,100	85.0	31.2	3.0

A2 = all paid-out expenses, both in cash and in kind

A2 + FL = A2 + imputed value of unpaid family labor

C2 = A2 + FL + rentals and interest forgone on owned land and fixed assets

Green implies MSP >=1.5x cost, Red implies MSP<cost