The higher MSP on kharif crops may result in a glut in the domestic market if exports get uncompetitive. This could, in turn, drag down the prices of commodities in the open market.
“When there is a sharp increase in the MSP, the producer gets out-priced in the global market. This increases supply in the domestic market and prices in the open market go down,” a government official told BusinessLine .
There is a strong likelihood of exports of farm products declining, even if all other factors remain the same, he added.
Since only 15-20 per cent of the total production of a particular crop is procured by the government, the bulk of the produce is sold by the farmers in the open markets; such farmers see a bitter harvest when when prices fall. The official observed that whenever there is a substantial increase in the MSP of crops, it leads to production that is higher than the demand.