New Delhi - Fixation of Minimum Support Price (MSP) for agriculture commodities over the production cost will have minimal impact on inflation, said a report of SBI's Economic Research Department (ERD).
"We believe the impact on inflation will be minimal. The long run trend of growth of MSP of paddy, bajra and wheat with food inflation suggests that the degree of relationship between them is weak," the ERD said in a report.
"RBI empirical study conducted on examining long-run impact of hikes in MSP of food crops, namely, rice and wheat on food inflation found that it was not as 'over-bearing as were generally perceived'."
The ERD also said the debate in public domain over fixation of MSP over the production cost --either A2+FL or C2 -- would be meaningless as long as the government could compensate farmers over and above prevailing gap between the market price and MSP of that particular crop.
"In fact, it is entirely possible that MSP based on C2 imputed price could be higher or lower than market price and hence what is more important is to look for market prices and not MSP," it said.
The government decision to supplement the fixation of MSP with a market compensation scheme was the best scheme under the current circumstances, it said.
"For some crops, the imputed MSP based on C2 is currently higher than market prices (barley, bajra and maize) indicating that in such situations the farmers may be compensated by the difference between prevailing MSP and market prices, if the prevailing MSP is lower than market prices," it said.
"In case, the market price is higher than imputed MSP based on C2, then the farmers may be compensated by the difference between prevailing MSP and revised imputed MSP."
The EDR said its estimates showed that the cost of such a scheme was minimal putting limited pressure on exchequer.
"Further, if such money is transferred to farmer accounts it will stop the leakages and the accounts of the farmers will remain active, with continued flow of transactions.
"We are sure an early implementation of the 1.5 times MSP scheme along with the price compensation support along with several other innovative schemes for the rural sector will pave the way for a transformational change in rural economy going forward," it said.