Prime Minister Narendra Modi is planning to raise the prices of food crops. His government is seeking to pay farmers at least 50 per cent more than the cost of their produce, boosting the retail prices of about a dozen monsoon-sown crops, due for harvest in October. Details of the initiative, which was first announced in the February budget, are expected soon.
The plan will help Modi fulfill his promise of raising incomes to placate farmers saddled with higher debt amid falling commodity prices, and shore up his support ahead of federal elections early next year.
But it’s expected to fan prices at a time when oil is surging, putting further pressure on bond yields.
Data due on Thursday will probably show India's retail inflation eased to 4.1 per cent in March from 4.4 per cent in the previous month, according to the median estimate of 39 economists surveyed by Bloomberg.
That will be the lowest in five months and below the central bank's projected 4.5 per cent level for the fourth-quarter of fiscal year 2018.
The softening in inflation in March may be temporary and due to a decline in food prices, particularly vegetables and pulses.
Pulses and rice are among crops that are eligible for the minimum support price announced by Modi’s administration.
The central bank last week held its benchmark interest rate and lowered its inflation projections for the fiscal year that began on April 1, while listing the plan to provide minimum support prices for monsoon-sown crops as a risk to inflation.
Modi’s decision to put more money in the hands of farmers, along with boosting spending on rural infrastructure and job programs, is bound to stoke consumption.
Expectation of normal monsoon rainfall, the main source of irrigation for the nation’s 263 million farmers, will also help drive up income of farmers.
It will have repercussions for higher inflation,” said Sameer Narang, chief economist at Vadodara, India-based Bank of Baroda. “The Reserve Bank will become slightly more aggressive if the hike in minimum support prices is higher than expected.”
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