Will this solve India's food problems?

In this issue:
» Vijay Mallya needs to go
» Low interest rates are hurting savers
» No escaping the slowdown in China's real estate
» Cloud computing to create 2 m jobs in India
» ...and more!

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00:00

One of the reasons why inflation has been so high in India in recent times is firmer food prices. While there is no doubt that rising demand was one of the factors that fuelled this rise, there were many issues on the supply side as well which stoked prices. For starters, inadequate warehousing and storage facilities meant that vast quantity of foodgrains was wasted. Unpredictable weather patterns also disturbed food production leading to shortages. Not just that, volatility in the global food market has also made the country vulnerable to price shocks given that some food grains such as pulses are imported. And in a scenario where India's population is expected to only increase going forward, ensuring food security has become an important issue for the government.

Thus, one of the ways it proposes to do so is to make private purchases of farmland overseas. In this regard, the agriculture ministry has sought views from other ministries on an institutional mechanism to extend sovereign support to India Inc's acquisition of farm land abroad that could include guaranteed buyback of harvest from the cultivation overseas. And Africa is one such region that the government has set its sight on for cultivating land for the production of pulses and wheat.

Whether this move is enough to ensure food security in India in the longer run remains to be seen. For starters, cultivating land in Africa may not be as easy as it seems on paper. The region is rife with corruption and civil war and buying land could be a process steeped in hurdles. Which is why what the government also needs to do is invest more in agriculture in India so as to improve the productivity of land. Investments in storage facilities and some much needed reforms in agriculture will also go a long way in bolstering agricultural productivity in the longer run.

01:26		Chart of the day

Today's chart of the day shows that India's GDP growth has slowed down in the December 2011 quarter, although it has been much better than that of the developed countries. The slowdown has largely been attributed to rise in interest rates and fuel prices and lower demand all of which has dented performance of Indian companies and slowed down investment activity as well. India's growth for December 2011 quarter has been the lowest. Plus, it is likely that growth may not accelerate for the next couple of quarters as well.

Data Source: The Economist

02:01

It is not as if the business model of low cost airlines has not worked in other parts of the world. That of Southwest Airlines in the US is a classic case study in this regard. But the man who pioneered the concept in India through his maiden venture Air Deccan is not happy. Especially because of the company that bought it over. After acquiring Deccan Aviation, Kingfisher Airlines moved on to abandon the low-cost model. Air Deccan was reincarnated as Kingfisher Red. With that the cost effectiveness and lean structure of low cost model also went out of the window.

Hence a recent article by Capt. Gopinath pointing out what should be done to revive Kingfisher did not surprise us. The former army pilot simply recommends that Kingfisher should get rid of its current owners and management. Removing Mr Mallya from the board and allowing banks to convert their debt into equity seems to be the most certain remedy according to him. That the business of aviation is not inherently profitable is known. However, running it smartly could have its benefits.

Do you agree with Capt. Gopinath's view that Mr Vijay Mallya should be removed from Kingfisher Airlines? Share your comments with us or post your views on our Facebook page / Google+ page.

02:36

Clearly, the concept of fiat money, the money backed by the Government, is one of the biggest curses heaped upon on the modern society. This is because it gives Government the power to not only print money at will but also to fix the cost of money. The cost of money being nothing but the interest rates. Nowhere is this more evident currently than the United States.

In order to bring about an economic recovery and ensure job creation, the US Fed has promised to keep interest rates near zero for the next couple of years. And this is really hurting the savers. For the Fed determined interest rate is not even keeping up with the rise in cost of living.

To make matters worse, Bill Gross, one of the world's most respected bond fund managers is of the view that interest rates would remain artificially low for more than a decade. Clearly, this is nothing but economics turning on its head. Never before has the encouragement to spend and discouragement to save been so higher than the current times. And the longer this lasts, the heavier the price to pay would be we believe.

03:06

Private sector banks such as ICICI Bank, HDFC Bank and Axis Bank will have to work a little harder to meet their priority sector targets this year. The Reserve Bank of India (RBI) recently rejected more than Rs 50 bn in loans to commodity traders. The central bank cited that these traders are not farmers, even though they deal with agri commodities. Thus, the loans cannot qualify under priority sector and will have to be treated as commercial advances.

Financial inclusion is one of the main aims of the government. A large portion of India's population remains unbanked and without access to credit. In light of this, domestic banks have to lend at least 40% of their loan book to the priority sector. This includes sectors like agriculture, small scale industries, microfinance etc. If banks are unable to meet these steep targets, they have to invest in low yielding Rural Infrastructure Development Fund (RIDF) bonds. Or they can try and meet their targets by investing in securitized assets of their NBFC peers. But rather than just meeting targets, our hope is that banks will work harder on actually uplifting the weaker sections of our country. This will be more beneficial for the country in the long run.

03:41

The real estate bubble in China was giving jitters to the Chinese officials. That was when they decided to put a brake on the so-called speculative real estate projects. For two years, China put a restriction on banks to lend to the real estate sector. A citizen's ability to buy multiple homes or homes in other cities was limited. Such aggressive restraint eventually started affecting housing prices. But as you may know, the Chinese economy is heavily dependent on investments. The real estate industry comprises a sizeable chunk of it. Any adverse slowdown in real estate would weigh heavily on the overall economy.

To avert any such crisis, the Chinese government announced a massive affordable housing scheme. As the larger real estate sector slows down, the government is hoping that this scheme would keep the sector afloat. And also keep the demand for commodities like cement, steel and metals buoyant. But as it seems, much of the scheme is mere propaganda. And though the government has made sky high projections, not much is expected to materialise in reality. It seems like there is no escaping the slowdown in Chinese real estate.

04:15

It is a common perception that high end technology reduces human intervention. And this leads to the loss of jobs. The same is the perception associated with cloud computing. Therefore, it would come as a surprise to you that Microsoft and IDC (International Data Corporation) have stated that cloud computing will actually create 2 m jobs in India by 2015. They expect these jobs to be created in the areas of communication, media and manufacturing. They estimate another 1.8 m jobs in the banking sector. All thanks to cloud computing. The way this will work is that cloud computing would allow companies to free up resources which are otherwise being spent on the legacy work and systems. These freed up resources would in turn be used for business innovation and creating new jobs. We believe that cloud computing would definitely be the next growth driver for Indian IT. To that extent, it would help in job creation for the sector. However, assuming that migration to cloud from legacy would help to create new jobs in other sectors, appears to be a bit farfetched as of now.

04:47

In the meanwhile, the Indian stock markets have been quite volatile in today's trade. After a strong opening they got further into the positive territory but then shed all its gains on election news and even went deep into the negative. At the time of writing, BSE Sensex was down by 143 points (-0.8%). Red marks were seen across Asian stock markets.

04:56

Today's Investing Mantra

"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch