Budget 2018: FM Arun Jaitley Hiking Up Minimum Support Prices For Farmers May Be A Recipe For Food Inflation

It’s that time of year where the terms budget and increment are used liberally and percentages are thrown around, most going over the heads of the common man. One thing that affects all of us is food prices. The NDA has chosen to play to a populist 2018 budget by supporting farmers after they scored poorly in that sector in the last 4 years.

“The government is committed to ensure that farmers get at least 1.5 times their investment,” Jaitley said, presenting his budget on the floor of parliament. “India’s agricultural export potential is as high as $100 billion (Rs6.38 lakh crore) against the current $30 billion (Rs1.9 lakh crore). Exports of agricultural products will be liberalised.”

Opportunity Cost Is Inflation

There certainly has been a crisis in the agricultural sector which makes up the largest percentage of our economy, however, as economists know well, there’s always an opportunity cost. In this case, increasing the minimum support prices for farmers would lead to a rise in prices (aka inflation) while liberalising exports means that the supply of agricultural goods in India would fall increasing prices further and adding to inflation.

Retail inflation in the subcontinent is already high thanks to the spike in crude oil prices as India imports around 80% of what it requires. As of December 2017, India hit a 17-month high in inflation as measured by the Consumer Price Index (CPI, which uses the prices of a basket of goods to determine inflation levels).

Already, sluggish growth, unemployment and a decrease in private investment have been a direct result of inflation. One can only predict what would occur in the case of the inflation rate spiraling out of the control of the RBI. Economics textbooks are right – there is no such thing as a free lunch.