India Agriculture Higher MSPs to boost winter crop harvest… and prices too : Religare Research

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India Agriculture
Higher MSPs to boost winter crop harvest… and prices too
The government today approved minimum support prices (MSP) for the rabi
(winter) crop. Prices of pulses have been raised significantly by 20%, while
those of other commodities have gone up moderately. This together with
favourable factors like improved water reservoir levels is likely to incentivise
farmers to increase the sowing area, reinforcing our expectations of a robust
rabi harvest and a 7% farm GDP in the current fiscal. While increased
production should ease price pressures, food inflation is unlikely to decline
substantially because of the upward shift in reserve prices and faster demand
growth for food vis-à-vis supply.
MSPs hiked especially for pulses: The Cabinet Committee on Economic Affairs
today approved the MSPs of fair average quality (FAQ) rabi crops of 2010–11 to
be marketed in the 2011–12 season. The MSPs are approved on the
recommendations of the Commission for Agricultural Costs and Prices (CACP).
Prices of pulses have been increased significantly to the extent of 20%, while
those of other commodities have gone up moderately. India has been a net
importer of pulses (a staple food), and the sown area under pulses has been
declining over the last few years. The demand-supply gap has kept prices at an
elevated level.
Reinforces our view of a robust rabi harvest: The MSP hike together with
positive factors like improved water reservoir levels and buoyant agricultural
prices is likely to incentivise farmers to increase the sowing area. This would be
in line with our view of a robust rabi harvest, leading to a 7% farm GDP in the
current fiscal.
Food inflation unlikely to decline significantly: While increased production
should theoretically alleviate price pressures, food inflation is unlikely to decline
substantially. The upward shifting of support prices also contributes to increasing
income and consumption in rural India, which is becoming less dependent on
farm income (key observation of our Rural Transformation Survey report dated
4 October 2010). With crop yields remaining more or less stagnant for long,
growth in demand for food has been outstripping the pace of supply
augmentation. Storage, distribution and logistics policies and facilities further
aggravate the situation. Food inflation is unlikely to fall below headline inflation
in the next five years and could remain in higher single digits on average for the
next two years