The Union Cabinet on Wednesday raised the minimum support price for paddy by Rs 200 per quintal, nearly 12% higher than least year. This is the steepest hike in minimum support prices for paddy since 2012-’13, when it was raised by 15.7%.

The minimum support price represents a promise from the Centre that it will step in and buy these crops if their market prices fall below a certain level. The Bharatiya Janata Party had promised before the 2014 Lok Sabha elections that it would give farmers prices 1.5 times their cost of produce. Finance Minister Arun Jaitley announced that the government would fulfil the promise when he presented the Union Budget for 2018-’19 on February 1.

The Cabinet Committee on Economic Affairs decided to raise the minimum support prices of 14 kharif crops.

The announcement comes ahead of Assembly elections in Chhattisgarh, Madhya Pradesh, Mizoram and Rajasthan later this year, and the General Elections in 2019.

The minimum support price of paddy of common grade was raised by Rs 200 to Rs 1,750 per quintal, while that of Grade A variety was raised by Rs 160 per quintal to Rs 1,750. The government said this will ensure at least 50% returns to farmers over cultivation costs.

The support price of cotton (medium staple) has been increased to Rs 5,150 per quintal from Rs 4,020. Among the pulses, tur will now have a minimum support price of Rs 5,675 per quintal, against Rs 5,450 earlier.

The minimum support price for ragi was raised to Rs 2,897 per quintal – around 52.5% increase year on year. This is the steepest hike among kharif crops.

‘Historic decision’

Prime Minister Narendra Modi said his government was committed to the development and welfare of the agricultural sector. “We have been taking steps in this direction and will continue to take the necessary steps forward,” he said.

Union minister Rajnath Singh said the government’s “historic decision” will ensure that there is an increase in farmer incomes and that it will have a wider impact on the economy. He said the CCEA has also approved a proposal to pay farmers the price difference between the minimum support prices and the market in the event that the procurement agencies fail to procure crops. “This will translate into a Rs 6,000 to Rs 8,000 per acre gain for the farmers,” Singh said at a press conference.

BJP National President Amit Shah said the decision reflects the Centre’s commitment to doubling farmers’ incomes. This will improve the quality of life of the farmers, he said. “Earlier [the government] introduced effective crop insurance for farmers and now this historic jump in MSP is testimony to Modi govt’s commitment towards Sabka Saath-Sabka Vikas,” he said on Twitter. “Unlike previous governments whose schemes remained only on files and on their manifestos, Modi sarkar is delivering on ground.”

Impact on inflation, fiscal deficit

Analysts have warned that the government’s decision could push up inflation. “Most of the wholesale prices are higher than the minimum support price,” Upasana Bhardwaj, senior economist at Kotak Mahindra Bank, told Reuters. “How that translates into market prices will be a function of how exactly the implementation of these minimum support prices would be. At this point, it is a little difficult to gauge exact impact on inflation. It seems to be inflationary, but magnitude is uncertain.”

However, principal economist at ICRA Limited, Aditi Nayar, said it is difficult to ascertain the impact of higher minimum support prices on inflation without details on whether the procurement of crops would be widened. “It is difficult to envision a scenario in which the recently announced hike in minimum support prices actually translates into higher realisations for farmers, without an increase in prices for the end-consumers or costs for the central and state governments through higher procurement costs and subsidy bill,” Nayar added.

MSPs have been hiked by a big margin in the years preceding the previous two General Elections as well – 40% in 2009 and 27% in 2013.