Should Subbarao now build warehouses?

Jun 15, 2012

In this issue:
» In which direction is Dr Copper headed?
» India steps up oil imports from Saudi Arabia
» No loan restructuring for mismanaged companies
» Why hotels are implementing austerity measures...
» ...and more!

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He joined at a time when not just Indian but global financial system was at crossroads. The subprime crisis had just reared its ugly head. It threatened to sink even the most resilient financial systems. Since September 2008, Dr Subbarao has donned many hats. As chief of India's central bank, he has had to be a savior, facilitator and negotiator, all at the same time. First he was supposed to de-risk the domestic economy from subprime crisis. Then he was supposed to rein spiraling inflation. After that he was expected to support India's fledgling growth rate. And now it seems he could be expected to do the unthinkable! If the government has its way, the RBI governor may also need to find a solution for rotting grain produce. The same produce for which the government has fixed very high minimum support prices (MSP) to appease farmers. And in the bargain, once again stoked inflationary pressure.

Every time the government goes wrong with its policy measures, it looks for quick fix solutions. More often than not the RBI is expected to use its monetary tools to set things right. Inflation, oil prices, rupee depreciation. The RBI is supposed to have solutions for each of these. Despite Dr Subbarao hardly mincing words with regard to the government's ineptness in handling inflation, his views have found no takers. Other governors with the Reserve Bank of India (RBI) have also cited marginal room for interest rate cuts. Quite understandably since the government's wasteful spending has gone to gargantuan proportions. But once again, all eyes are fixed on the upcoming policy review that could ease liquidity further. That would ease growth pressures, albeit temporarily.

But we will not be surprised if this time a prudent Dr Subbarao should propose building the warehouses too! After all, our government does not seem to realize that the best solution to tackle inflation is ensuring better storage of food grains. On one hand the government is allowing surplus produce to rot in the open during monsoons. There is also a proposal to offer wheat at dirt cheap prices to industries. On the other hand, high MSPs (Minimum Support Prices) are being doled out to appease farmers. All of this if tackled with better warehouses and logistics could solve the inflation problem for good. And that would leave the RBI with more time to look into crucial matters, rather than quarter on quarter inflation control. Well, if the government remains tongue tied and paralyzed, it would eventually be pertinent for the more hands-on regulators to take some radical steps.

Do you think the RBI should once again yield to the government's demand and reduce interest rates to curb inflation? Let us know your comments and post them on our Facebook page / Google+ page.

 Chart of the day
As the government's reform measures fail to make any headway, investors have increasingly lost interest in economy and infrastructure related stocks. Instead the consumption story has once again taken centre stage. As seen in today's chart, the performance of the benchmark indices on the BSE over the past year, shows that commodity and infrastructure stocks have failed to evince investor interest. On the other hand more resilient and defensive sectors like FMCG and Healthcare have found more takers. Auto and banking sector have seen some volatility depending on the RBI's interest rate stance. But the negativity towards IT stocks is largely to do with the rupee's uncertain future with respect to the US dollar.

Data source: Yahoo Finance

Fundamental analysis is not a good place to be in these days. The simple reason being that policymakers are hell bent on not letting free markets run their course. Every time a bad news comes along, central banks seem ready with money in hand. No wonder, asset prices are displaying extreme volatility. Take Copper for example. Just as it was appearing that the industrial metal would continue its losing streak, it did a U-turn yesterday and posted its first weekly rise in seven weeks. All of it on the back of reports that central banks are poised to inject liquidity in the case of a crisis in the financial markets. Fundamentals though continue to remain weak. The USA, as well as China, is facing pressures on the economic front thus clouding demand prospects for copper. But as long as central banks stand ready to throw money at the system, it would be a risk to bet on the direction of copper prices. Our heart goes out to not just analysts but businesses that have to manage their costs in the midst of such uncertainty in commodity prices.

That oil forms the largest share of India's import bill is not news. India is in fact the fourth largest oil importer in the world. Interestingly the country appears to be stepping up its oil imports as it has sought another 100,000 barrels per day (bpd) from Saudi Arabia. This is in addition to the 640,000 bpd that it received in 2011-2012. This increase may suggest an increase in demand for oil from India. That could be one big reason. But another and equally important underlying reason is quite different. India needs to cut down its imports from Iran. Due to the sanctions by US against Iran, India too was finding it increasingly difficult to meet its oil import needs. Therefore, it has sought more oil from OPEC (Organisation of the Petroleum Exporting Countries). But not from Iran.

As the Indian economy has slowed down, the hotel industry has not been spared either. The debt crisis in the developed world has not eased. As a result, foreign tourist arrivals have seen a drop. This has led to lower occupancies in hotels. Rising airfares have only added to the industry's woes. Companies have also undertaken austerity measures. This means that business hotels, especially five-star ones, have not benefited much from conferences and meetings. Despite this, the hotel industry claims to be better prepared than what they were in 2008 when the global financial crisis struck. In response to the slowdown, hotels have begun to implement austerity measures themselves. These include cutting down marketing expenditure, staff-to-room ratios and energy consumption. Whether these moves will bolster the sagging bottomline of hotels remains to be seen. But given many near term concerns for the economy, these could be steps in the right direction.

The last two quarters of FY12 saw a massive wave of corporate debt restructuring (CDR). Air India and various power discoms saw their loan rescheduled. However, the Reserve Bank of India (RBI) may now make it harder for corporate loans to be restructured. That is unless there are valid external reasons for the same, which are beyond the control of managements. For example: sharp fall in cotton yarn prices and poor global demand have sorely affected textile mills. The textile industry is now demanding a Rs 1 trillion recast of loans. As of now, the outstanding standard restructured assets of the banking system are estimated at between Rs 2.1-2.3 trillion. Restructuring of the tenor or interest rates can help the borrower better service the loan versus defaulting on the same. However, the RBI wants to make sure that mismanaged companies are not given a longer leash. Thus, it makes sense for the central bank to streamline its guidelines for this matter.

China's export competitiveness is subject to multiple factors. Artificially pegged currency and economies of scale are a few of them. And when it comes to export of power plant equipments China enjoys a clear sustainable competitive advantage. This has placed the Indian equipment manufacturers at a disadvantage. Now, considering the way the Chinese are making inroads into the Indian market. It seems difficult that this competitive gap would ever narrow in the future.

We have been hearing a constant rant that the Chinese profligacy is attributed to currency advantage. But this ignores the other benefits that come along with China. Cost advantage is one of them. A Chinese manufacturer can provide power equipment at almost half a price than an Indian manufacturer. This is after accounting for the cost of transportation and import tariffs! It can also deliver that equipment in much shorter span of time. Access to cheaper loans from Chinese banks provides another advantage. Thus, if India has to overcome the China threat it will have to take multiple steps. Method to reduce marginal cost of production is one of them. A sound reform agenda with free market pricing is another.

Taking cues from their peers across Asia, the indices in Indian stock markets made a firm up move into the positive territory backed by investor interest in heavyweights in auto, cement and banking sectors. The positive sentiments seem to be primarily based on hopes of rate cut by the RBI. At the time of writing, the BSE Sensex was trading 192 points above the dotted line. The indices in most other Asian markets closed higher in today's trade. Those in Europe have, however, opened in the positive.

 Today's investing mantra
"A disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets" - Warren Buffett

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    9 Responses to "Should Subbarao now build warehouses?"

    George Elava

    Jun 17, 2012

    It's not the RBI Governor who should direct building warehouses. Let him concentrate on restricting the currency availability either by interest-rate cut or by enhancing the same. But, of late, the action of RBI Governor doesn't give any impact in the economy primarily because the quantum of black money and fake money in the circulation is enormous. Just for an example, 3 days before, in Bellary about 300 jute bags (goonies) of destroyed currencies (of 100 & 500 notes) was found abandoned near a Saw Mill. Probably it is assumed this was the act of those black money holders of Bellary Mining jargons who seems to be escaped from the hands of investigating CBI officers. In fact, such incidents are quite often happening in these days. But the Government as well as the authorities are not taking adequate measures to curtail it only because those who are in behind scenes are socially influenced people. To be more clear, it is high time than to say it out, the official money circulated among the general public is lesser than the fake & black money currencies available in public. In such a situation, if the Government started printing more official currencies, do you think, the problem will be solved? Nor, would you think the RBI exercises on Interest-rate cut/ increase would solve the problem? Definitely not, instead this will make the situation more complicated and things will lead from bad to worse. In my frank opinion, our elected members should come forward and save our agricultural land and our farmers there by increase our natural productivity. They should build more good roads and infrastructural facilities in rural villages. They should build more warehouse to store these food grains and also maintain very efficient distribution system so that the needy gets his livelihood!


    P.Sai Babu

    Jun 16, 2012

    Recently Dr. Duvvuri Subba Rao addressed a gathering at Administrative staff college, Hyderabad and clearly expressed his views of not reducing interest rates in the wake of positive inflationary trends as lakhs of middle income group are depending on interest income. Reducing interest rates will definitely dent their purchasing power and lower their standard of life.

    The government is under pressure from Industrialists to lower the interest rates & naturally Govt. is bowing to their demand & putting pressure on RBI to do so.

    We have still a long way to go in developing a full proof infra structure to match with developed countries as they will ensure us better storage of food grains, better movability of vehicles with out traffic congestion which is eating away of our precious Forex exchange in way of high fuel bill.

    When will our Government wake up to these issues?

    Sai Babu



    Jun 16, 2012

    Really, the time has come for building warehouses for the grains. I am sure the cost of building of warehouses warehouses will definitely be lower than the amount we are lossing by allowing the grain to deteriorate.


    g r chari

    Jun 15, 2012

    At least we have one institution which is supposed to act with its head in the right place and not through its mouth (a la politician) and the countrymen can only hope that the RBI is allowed to do it's job honestly & independently. Controls have no place in a dynamic economic situation & decontrol of supply bottlenecks will have to go hand-in-hand with the lowering of interest rates. It has to be a concerted and joint action of both the govt & the RBI. Just lowering of interest rates is not going to bring down the interest rates.


    Umesh Sharma

    Jun 15, 2012

    yes building store houses would indeed be a good solution to preserve food grains. Nabard can give subsidy to farmers for constructing such store houses.The money they save from preserving food grains can be used for servicing the loan.There will more jobs, asset creation and active resistance to inflation on account of more supply.It should spread in all districts Taluks and Towns.
    Taxing of rich is not the solution.NO body earns to pay for the convenience of others even if it happens to be the Government of the land.The Governments should be more responsible and learn to spend wisely for serving the people who pay taxes.It is time Zero budgeting is adopted and all the wasteful schemes are dumped in the dust bin.Even the Government servants should be made aware to earn their living by being useful to the society and not indifferent Babus.Lowering of interest rates is certainly not advisable as the inflation is already eating into hard earned savings of people and a time may come when people will rather spend than save

    Like (1)


    Jun 15, 2012

    It is shocking that year after year precious food grains are allowed to rot.That too in poor country where 50 5 of population don't get 2 square meals a day.What is wrong with us all .The solution is simple and is a fraction as compared to the wastage in holding ,say commonwealth games.And what does our precious agricultural minister do,that is apart from getting slapped?Nothing .may be he is making his money in allowing the grains to rot .Who knows how much really rots and how much makes its way into the market?Shame on us all.

    Like (1)


    Jun 15, 2012

    There are very few institutions left in India where the technocrats/bureaucrats are allowed to run independently w/o interference from their political masters.

    RBI is one them.

    The Governor should follow his own diktat rather then listening to the Govt's plea of lowering the interest rate.

    The inflation has been stoked due to govt spendthrift policies pouring money in all non productive sectors like waiving off farmer's debt just before the last Lok Sabha elections in 2009(Rs.70,000 Crores) ,NREGA (Rs.50,000 Crores annually),Sixth Pay Commission {Rs.30000 Crores per annum).Unfortunately many of such expenses are recurring in nature.

    And none of them has any co-relation with RBI interest rates.

    Hence the arguement of Dr.Subba Rao that by keeping the interest rates high he will control the inflation does not really hold.

    By reducing the interest rates at least he can spur the economic growth and the common man can counter the inflation bu higher wages/profits.

    Like (1)

    Borkar M.R.

    Jun 15, 2012

    Of course YES! Because he is supposed to keep economy running. The
    Govt mean politicians r 2 keep their Chairs,and of course their
    cuts and what not, The industrialists to keep their margins - not
    cos balance sheet, poor Janata to keep their Belts tightened. If
    the food grains rot so what! Our Agri Minister and his home state
    can start more breweries so people can drink the hooch and forget
    everything. Long live this Democracy to hypocracy.

    Like (1)

    Nadir Godrej

    Jun 15, 2012

    RBI should lower interest rates by 200 basis points.The inflation in India is entirely due to high global commodity prices and the weak Rupee. Neither of these factors can be changed by high interest rates. The RBI has shot down the Indian economy by its senseless actions which could not possibly have helped to reduce inflation. They ignored all warnings. Global commodity prices have started falling and will fall even more in due course. Lower interest rates will help the stock market. And this will encourage capital flows into India. A stronger Rupee will bring down inflation. Whereas persisting with high interest rates will block capital inflows which will aggravate inflation. The RBI made the same mistake in 2008 and lowered interest rates far too late instead of reacting to falling global commodity prices. Let it not repeat that disaster.

    Like (1)
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