The Union Cabinet last week cleared a big jump in minimum support prices (MSPs) for Kharif crops. It gives farmers a fixed margin of 50% over their input costs. This marks the highest increase in MSP since 2013. Needless to say, the announcement is eye-catching, and amid lingering farm sector woes, it also sounds a much welcome one. The last week decision is in line with the Modi government's Budget announcement that it would procure crops from farmers at 1.5 times the cost of production.

Supporters of the hike view that farmers would benefit from it. The farm sector, despite several ongoing reform measures taken recently, has failed to recover and the hike will now give farmers a much needed relief. Nominal agricultural sector GVA growth stands at 4.5 percent in FY18, the lowest growth since FY04, and the big MSP hike, followed by aggressive procurement by the government, can certainly reverse this situation. Rural demand will get a big push as well, giving a multiplier effect for a large number of sectors.

Critics are sceptical about the move, however. The Opposition took no time in terming the decision as 'politically motivated'. Several farmer unions are of the view that the hike will hardly help as it is based on the A2+FL formula which, unlike the C2 formula as recommended by the M.S. Swaminathan Committee, does not take into account several costs like rent on land and interest on capital, etc. Some economists, on the other hand, see no logic in offering farmers a fixed margin of 50% over their input costs, ignoring demand, supply and international competitiveness.

Both sides of the argument seem to hold water. The decision, coming just ahead of the upcoming general elections, definitely looks like a politically motivated one. The concerns raised by farmers and economists cannot be downplayed altogether. But still we can expect benefits from the hike. It will depend, on the one hand, on how the government ensures benefits to the farmers, and on the other hand, on how effectively it can handle inflation, fiscal deficit and other possible side-affects of the decision.

I invite your opinions.