Is the Govt destroying our food market? - The 5 Minute WrapUp by Equitymaster
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Is the Govt destroying our food market?

May 11, 2013

In this issue:
» Can India's gold be confiscated?
» Bulls are raging in the bond market
» Global central banks continue easing to no avail
» A terrible year for the auto industry
» ...and more!

A report of Firstpost caught our attention. It talks about the Food Security Bill, The Minimum Support Prices (MSP) and the way the two will affect us. In short, they will work collectively to destroy our agricultural and food markets. And Firspost seems to be using sound logic to back up this claim. Let us understand their logic.

The Food Bill will ensure that subsidized grains are given to nearly 65% of the country's population. This includes people who need subsidized grain as well as those who do not. Nevertheless the program covers both sections so the fiscal burden of this Bill can be easily imagined. The poor economics of the Bill will lead to fiscal burden. The Commission on Agricultural Costs and Prices (CACP) has already highlighted the hidden costs involved in the Bill. The CACP has stated that the MSP decided by the government is not really based on the demand and supply dynamics. Rather the MSP appears to be arbitrarily decided. Such costs are expected to take the total cost to Rs 6,000 bn over three years. Imagine the fiscal burden this would cause!

Now come to the darker side of the story. The Food Security Bill will make the government a monopoly in the food grain market. It would be the monopolist buyer as well as the monopolist seller. The scams of the past are a clear testimony to what happens each time the government enters a monopolist position. You guessed it right. There is widespread corruption. So how would this affect us? Well it would lead to higher prices and higher food inflation. This means that the final price of all items will go up. Net result - the Food Security bill will make sure that only the rich are able to afford food. And that corruption is rampant.

We do agree with the fact that food security is necessary. Particularly for those who cannot afford food. But will the Food Security Bill really provide this security? The arguments seem to be against it.

Do you think the Food Security Bill will really help the poor? Please share your comments or post them on our Facebook page / Google+ page

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 Chart of the day
The fiscal year ended March 2013 saw coal imports sky rocket. India's coal imports rose by almost one third to 135 m tones during the year. A big reason for this was the slowdown in domestic output. This is the fifth year in a row when domestic coal output did not even meet the target output set by the country's largest coal producer, Coal India. As against a target of 464.1 MT for FY13, it achieved only 452.2 MT as production. Unless the company is able to start adhering and meeting its targets, the country's power producers will not have much choice but to import coal. Let us not forget that imported coal is much more expensive as compared to domestic coal.

Source: Financial Express

The Indian government seems to be the biggest villain in the eternal love saga between Indians and gold. The government has blamed gold imports for the rising current account deficit. And in recent times, it has waged an all-out war against the yellow precious metal. All in the hope that it would deter gold imports in the country.

Here's another whip on gold importers. Under India-Thailand tax treaty, gold was being imported at a concessional rate of 1%. However, these imports have to be backed by rules of origin certificates. But it was found that this was being heavily misused by importers.

Owing to the concessional tax rate, Thailand had become a conduit for Indian gold imports from other countries. After the Directorate of Revenue Intelligence found discrepancies earlier during the year, India suspended gold imports from Thailand.

In fact, Thailand has even agreed to retrospectively re-verify rules of origin certificates that have been issued to Indian importers. So the axe is now going to be on gold importers. If guilty of wrongdoings, importers may have to shell out additional duties. In an extreme case, their gold imports may even be confiscated.

It is not just gold that is reaping the benefit of being a 'safe haven'. Government bonds, of not just developed but developing economies too, are evincing considerable investor interest. Particularly that of domestic investors. In fact globally bond investors are searching for higher yields. As per Firstpost, FIIs have fully subscribed to limit of US$ 5.5 bn in Indian government bonds. Institutional investors like mutual funds, insurance companies and corporate are also the major buyers of such fixed income papers. But all credibility and safety of such instruments lies in the government's ability to ward off systemic risks. This reminds of the words of ex-Chairman of Citibank, Walter Wriston - "A country does not go bankrupt." Well, not just Greece but many other economies have proven him wrong in recent years. And if governments in India and rest of the world do not get rid of fiscal profligacy; it is only a matter of time before prices head southwards. Hence for us it is only gold that deserves the 'safe haven' status, if any.

Our knowledge of the world we live in is imperfect indeed. How else can it be? There are so many variables involved that it will be difficult even for the most powerful supercomputer to make an attempt to predict the future. Thus, all that we can do is put our theories to test and if they succeed, persist with them. But what if the theories don't bring in the expected result? Well, rationality says that such theories should be abandoned and new ones be adopted. However, Bloomberg reports that a theory has now been tried 511 times and it's still far from being jettisoned. In fact, there's more of it coming our way.

If you haven't guessed by now we are referring to the policy of central banks around the world of monetary easing. When South Korea cut its rate yesterday, it was the 511 such easing after June 2007. However, even after so many attempts, economic growth is barely registering a blip on the growth meter. What more, the effect of easing is showing up on risk assets like equities and threatening to create massive bubbles. Unfortunately, very few policy makers are taking the cues. They are administering more of the same medicine instead of critically questioning current approach. And these are nothing but ominous signs we believe.

It definitely is not a good time for car manufacturers. However, the same cannot be said for people looking to buy new vehicles. This we say because of the many discounts and reduced (or none) waiting periods. But despite these, the demand for vehicles continues to dwindle. As per industry body SIAM, car sales have fallen for the sixth month in a row during the month of April 2013. This is believed to be the longest decline ever since the body started data collation. And this was way back in 1997-1998! Domestic car sales are believed to have declined by as much as 10.4% during the month to about 150,479 units. The high interest rates, weak consumer sentiments coupled with broader uncertainty relating to the economy seem to be the key reasons. However, with pay hikes in the range of 12%-19% (as per surveys) expected in the current year, one could possibly see the demand picking up eventually. Nevertheless, given the high inflation rates, how much of the hikes translate into discretionary spending is difficult to say. Others factors that could lead to increased demand include new product launches, in addition to the lower interest rates

All the major global indices, continued to have a positive outing over the week. A strong US jobs report which showed that weekly jobless claims fell to a five-year low helped allay fears of slowdown in the world's largest economy and bolstered the US markets which were up by 0.7%.

European equities punched fresh five-year highs, continuing to draw support from central bank stimulus. Investors were looking to a meeting of Group of Seven finance chiefs for reaffirmation of policymakers' commitment to economic stimulus - the key driver of equities' 11-month long rally and for clues on possible further measures from central banks. The stock markets in Germany posted the sharpest gains of 1.7%. The UK market was up by 1.1% following upbeat UK manufacturing and industrial data for March 2013.

The Indian equity markets closed the week on a positive note. BSE-Sensex was up by 2.6%. Only the Brazilian market saw a decline and was down by 0.1%. The Chinese market was up by 1.9% over the week, even though higher than expected Chinese inflation data stoked fears that the Chinese government would withhold additional easing The Japanese market spiralled higher after the U.S. dollar climbed atop the 100-yen level for the first time in four years, stoking sharp gains in exporters.

Data source: Yahoo Finance, Kitco
(* The closing return for Indian stock markets is calculated as on May 10, 2013)

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    20 Responses to "Is the Govt destroying our food market?"

    Amit Sengupta

    May 15, 2013

    Why food security bill? Has the Indian polity decided to keep 65% of the populace eternally dependent up on the largesse they dole out to maintain their vote bank. Dependent for food, education, health and all basic needs to a section of people, who don't even have an understanding of quality of living. I think there should be a national debate on this issue. It can not be decided by the political leaders alone, more so when we look at the scams, each one at a higher magnitude than the last one. Let's face fact- we do not have a very credible and capable set of politicians at the helm, irrespective of their political leanings. Corruption appears to be one factor binding all to a class of their own. The others, the common man, can at any time be subjected to a co-lateral damage, in pursuing their objective.
    Why food security? Why not job secutiry, where by people earn their money to live on and gets a chance to feel good in contributing to the nation's prosperity?
    Why not education security (we pay a cess for education on income tax), so that the next generation gets a better quality polity?
    Instead, the food security bill will keep generating creeping corruption on a larger base. The scale of corruption will not only be larger, it will rake in much larger no of people. And with it, our dream of generating better quality citizens will be drowned underneath.


    Chandra Shekhar Sharma

    May 13, 2013

    This bill is intended towards another source for corruption which will result in loot of money by the politicians and bureaucrats, and of course babus of both central and state governments. MREGA has failed and PDS is no more required because sugar is also now free from govt, control. So the Congress has conceptualized another source of income and scam. The result will be poor will remain poor, middle class will also have to go for line to get the food grains, the prices will increase. The rich will never be affected.
    The problem is our population still thinks that they are in British raj and the present government is ruling them on their behalf. They do not come up together to voice their concern thinking that chalo jo hota hai hone do, ek din to marna hi hai.

    Like (1)

    ganesh adiga

    May 13, 2013

    sorry sir
    fodd security bill will systematically destroys our farmers and agriculture

    Like (1)


    May 12, 2013

    I agree,providing food at highly subsidized price to needy 7 not that needy is not the right solution.Instead this high amount from tax payers money should be used to create more infrastructures for private/public investments in industries,agriculture etc. thus creating more jobs & productivity which will increase availability.Instead of giving charity bring respectability to our citizens,If at all Govt. is giving alms they should try & save grains in govt goodowns & distribute it to needy,free of cost or at subsidy.

    Like (1)


    May 12, 2013

    Food Bill , if and when passed, will become the biggest scam engineered by our political masters. No doubt that the poor need food but the current system does not even identify the real poor. Govt. does not have a clue how to ensure and secure the real target of the Bill. When the Bill is implemented, do not be surprised that our politicians become the first beneficiaries !

    Like (1)


    May 12, 2013

    When one thinks about where the money is coming from for the Food Security Programme one is indeed deeply worried. The budget deficit scenario as it is is deeply worrisome. Some rating agencies, though they were caught napping before the Financial Meltdown of 2007-08 and though they are not free from conflict of interests themselves, are not in a mood to upgrade India's sovereign rating ostensibly because of the fiscal deficit and slow policy initiatives oriented towards speedy and equitable economic growth. The corruption busting mode that India has at last entered into with some perceptible seriousness now is a big positive , though it is creating a lot of screaming soundbites. For this trend to bear fruit, civil activists must now span out across the country and disseminate knowledge and empower citizens to use the provisions of the Right to Information Act and the Citizen's Charter and Grievance Redressal Bill as soon as it becomes Law. Also, in the din of news soundbites we are not focusing on getting back the money lost to the exchequer because of the scams. This calls for forensic financial expertise on our part and cooperation from other countries. The International Association of Anti-corruption Authorities, (IAACA) scheduled to meet from June 22 to 24 in Jinan, Shandong Province, China, will be discussing Technical Assistance and Information Exchange, as enshrined in Chapter VI of the UN Convention Against Corruption (UNCAC). This meeting could turn out to be a watershed in the international fight against corruption, particularly with regard to inter-governmental cooperation in getting back unaccounted moneys to countries of their origin. By and large it is developing and poor countries which will be greatly benefited if the funds stashed abroad by tax evaders are brought back. One hopes India will lead the developing countries here. This effort, when it fructifies, can indeed underwrite the subsidy for the Food Security Bill, along with tightening of the tax collection regimen and broadening the tax base and streamlining tax laws.
    There is also another angle to the Food Security Bill. There is near unanimity among all major politicians regarding the need for such a bill. As pointed out by you, there will be Government monopoly in food grains. The present PDS, or the ration system, is like a milch cow milked by the lowest level government servant to the top most levels of the bureaucracy and the politicians. In such a scenario, is the near unanimity among politicians on the Food Security Bill an assured way of looting the country forever? I do not think so. Winds of change are blowing across India ever since the August 2011 fast-unto-death by Anna Hazare for the Jan Lok Pal Bill, basic components of which have been promised by the Parliament. I have a gut feeling that the Lok Pal Bill will surely come either in this Parliament or in the next. CBI will be set free. Without a bloated bureaucracy, an efficient, lean and mean Lok Pal with enough autonomy will come about. The corruption busting mindset will become more robust. Civil activism will reach new heights, empowered by social networking and advances in smart phone technology and increased teledensity. Add to this the Direct Benefits Transfer Scheme through mobile ATMs and rural banking facilitators underpinned by the superb technology behind the Aadhar Card and it is a fair guess that India will indeed find the resources to target the really needy through the Food Security Programme and lift them out of poverty and malnutrition within a decade's time at the outside. It is my hunch that more than the funds for the Food Security Programme, it is the appalling eating habits consisting of consuming primarily low protein-high-carbohydrate staple foods that we will have to battle against if we have to remove malnutrition which is perhaps the single most insidious threat to long term economic development of India because it will reduce labour productivity, tragic attrition of the workforce and increased health expenditure exponentially. Not many seem to see this as the greater threat than finding the funds for the food Security Programme.
    To be fair to some State Governments we have to mention that they have greatly streamlined the PDS and plugged leakages. Some State Governments like Tamil Nadu provide subsidised pulses like urad and toor dal. This has brought about substantial health benefits though studies have yet to confirm this.
    To sum up, when the Food Security Bill becomes law, along with Aadhar-based Direct Benefits Transfer Scheme; when RTI, Citizen's Charter and Grievance Redressal Bill become robust means of bringing to book errant officials; when corruption busting goes global with India perhaps taking a lead among developing countries, funds will never be wanting to usher in a historic future of equitable prosperity for India, no matter if there is Government monopoly of food grains.
    If India had a golden past, there is no mistaking a golden future too beckoning it.

    Like (1)

    Suresh A S

    May 12, 2013

    Food security should be for the people who have alrady worked and no more able to work like above the age of 60+. Food security for the people who are yet to start working. Children belwo 18Yrs. Food security should not be for the people between 18 to 60 year and who has physical strength to work. Cost of the food should match the daily wage. All freebies like free laptop, TV, mixer and grinder should stop. They will make more electricity consumption and the it will only help the product manufacturer. It is not going to help poor. It is only political gimmick. All ration shop should stop selling. People should be able to work and they should be able to buy food with the money earned even on daily wages.

    Like (1)


    May 11, 2013

    1 food security bill seems and suppose to provide subsidised food for the majority of the poor people If it is done the motivation for the same people to grow food will diminish and the scarcity of home grown food will make it more expensive
    2 As It is the governments payment of 100 days per year guaranteed has created so much of scarcity of work force in the Industry causing India becoming an expensive place for manufacturing and hence our competence of export will come down
    3 while competence of export coming down with more food to be imported ,our balance of payment will be hurt very badly and Indian deficit budget will ever continue

    This bill will take India in a deep mess

    Like (1)

    Bhaskar Rao

    May 11, 2013

    Food security bill is a way to ensure all functioneies of the congress party can merrily loot this country in the name of am admi. Like all schemes of the congress party, it will only help divert food in name of security to fill the coffers of most congress functineries and barely reach the poor in the country. This is going to be a great loot of the country to fill the accounts in Switzerland and all those places where such accounts are help. God only have to save the country from the clutches of these suckers.

    Like (1)


    May 11, 2013

    yes i agreed with the view & think government can't control fiscal deficit

    Like (2)
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