India's unrelenting food inflation problem

Nov 25, 2013

In this issue:
» Jim Chanos thinks Buffett's Exxon deal is a 'value trap'
» Performance of mutual funds worse than 2008
» Is India really a great investment destination?
» A strong case for reforms in global fund management
» ...and more!

Almost all economies tend to go through cycles of high growth followed by periods of slowdown. This is an inherent characteristic of any economic system. But when does a slowdown become a big danger for the economy? The answer is when the slowdown is accompanied by persistently high inflation.

Now why is this combination such a thing to worry about? Let us explain. When an economy slows down, it means that demand is sluggish and investments are drying up. When new capacities are not getting added, it means jobs aren't being created. As a result, household incomes start stagnating.

If against such a scenario there is high inflation in the economy, it robs people of their purchasing power. And people at the bottom of the pyramid are the worst hit because they hardly have any financial buffer to withstand such rapid increases in cost of living.

India is currently bracing this grave economic danger. And mind you, our country has the highest inflation compared to any other developing economy in the world! One of the biggest drivers of this inflationary monster is continually high food inflation. Consider for instance, food inflation in October was as high as 18.2% year-on-year (YoY). Vegetable prices were up 78.4% YoY driven by triple-digit increases in prices of onions and tomatoes.

If you recall, many economic commentators had pinned their hopes on this year's good monsoon to relieve the country of the inflationary pressures. But still we have seen no reprieve at all. Now these so-called 'experts' are expecting food prices to ease in December.

Well, we would certainly be happy if food inflation comes down next month. But the ground realities do not seem to warrant such optimism. In our view, food inflation seems like a long term structural problem. As per Business Standard, food inflation in India averaged over 12% (annualised rate per month) over the last 60 months. That's a five year long period!

This extended adverse scenario is an outcome of flawed government policies and highly inefficient public distribution system. India has severe supply side issues such as poor storage infrastructure, inefficient logistics, hoarding by traders and so on. And now with the National Food Security Act, the problem is likely to get much bigger because the government will control food distribution to two-thirds of India's population. We're afraid this ambitious vote-seeking program is going to put tremendous pressure on the government's budget. Moreover, given the track record of public food distribution systems, this program too is likely to be mired in corruption and inefficiencies.

Do you think food inflation will come down any time soon? Let us know your comments or post them on our Facebook page / Google+ page

 Chart of the day
We came across an interesting report called Billionaire Census 2013 published by Wealth-X & UBS. As per the report, the current world billionaire population is 2,170. Their combined net worth stands at a whopping US$ 6,156 bn. This is three and half times India's FY2013 gross domestic product. At 103, India has the 6th highest number of billionaires in the world. Of these, 30 are based in Mumbai alone. This has made Mumbai the city with the fifth highest number of billionaires. In our view, these statistics are nothing to cheer about. In fact, they only point out the stark income inequalities in our country. And as India confronts multiple economic challenges, the gap between the rich and the poor seems to get wider and wider. This is worrying because highly skewed wealth distribution tends to eventually culminate into severe socio-political crisis. If policymakers want to save India from such grave risks, they will have to reform the economic system so as to make growth more inclusive.

Mumbai Has Fifth Highest Number Of Billionaires

----------- When they say something's wrong, it's wrong! -----------

As per separate news reports recently...

The Chairman and CEO of PepsiCo, Indra Nooyi, observed that India had gone from being a "must-invest" country to a "must-deal-with" country.

And Karl Slym, the MD of Tata Motors also agreed that economic condition is very difficult at this moment.

So there's no doubt that things are not looking very good at the moment.

But if you want to know the real problem that YOU as an Indian are about to face really soon, we suggest youclick here and read this letter right away.

Given the way they invest, it is quite natural for short-sellers and buyers to cross paths. In other words, a short-seller is likely to be negative on the same stock a buyer is positive about. It's not every day however that a legendary short seller and a legendary long term investor are pitted against each other. There was news doing the rounds recently that Warren Buffett has acquired a sizeable stake in oil giant Exxon Mobil. Knowing Buffett, the investment has of course been made from a long term perspective. Interestingly though, Jim Chanos, arguably one of the best short sellers in the world, is reportedly bearish on the stock. The costs of finding oil have gone through the roof as per Chanos. And hence, the economics of the business are clearly deteriorating.

Unfortunately, it is not possible to hear Buffett's side of the story. But it's unlikely he's unaware of the rising costs of finding new oil. It can therefore be assumed that he seems more hopeful than Chanos on the business fundamentals. They are deteriorating all right but the competitive strength of Exxon would mean that it will still continue to generate returns well above its cost of capital. But it would be a mistake to assume Buffett's supposed readings as the right one. For Chanos is no pushover either. Thus, all we can do is just wait and watch.

The Indian equity market indices have hit new highs in recent times. But all is not hunky dory with the mutual fund industry in the country. As reported by The Indian Express, mutual fund industry has delivered its worst performance since 2008. The daily stated that the top 20 diversified equity funds are up by just 0.5% this year. The fund managers have blamed the poor performance on the volatile global conditions as well as the Indian rupee. These macro issues have forced them to take a conservative stand, and this has worked to their disadvantage.

Of course there are some fund managers who took a wrong call. For example the HDFC's Top 200 Fund lost out due to its large exposure to PSU Banks like <>State Bank of India that have delivered subdued performances. As such the performance has been so bad that the regulator, SEBI, has increased its scrutiny especially for new funds. What investors need to do is to be careful and cautious when it comes to investing in mutual funds. Study their portfolios closely and also track their performances. Invest only when you are absolutely comfortable with what the fund is holding. Just investing in the top funds may not be the right move. For you could end up losing money instead of making any.

Not sure how much of this confidence would fructify into real investments. But prima facie at least, E&Y's latest survey on corporate confidence for international investments is worth a thumbs-up. The survey covered 1,600 senior executives from large companies across 70 countries. As per E&Y, India features top on the list of possible destinations for investments by companies the world over. India is followed by Brazil, China, Canada, US and South Africa in the pecking order. The depreciation in the currency and the government's facilitative policy towards FDI has primarily upped investor interest. Also the fact that many Indian corporates are looking to divest stakes in non-core businesses offers opportunities. Now to what extent will this bring in investments into the country is anybody's guess. But at least the government should be careful this time. It cannot afford to once again mire the investments in bureaucratic mess.

In recent times, global fund management companies have gained an increasing clout on financial markets. So much so that their actions have worsened problems for policymakers at a time when the economic scenario remains volatile. As reported in an article in the Financial Times, in 1985, global mutual funds hardly held a trillion dollars in assets. This has now swelled to US$ 35 trillion. Because of their increasing dominance, there has been a tendency to create a different reality than to accept the actual one. Not just that, most of these funds have been thinking along the same lines. No one entity really stands out in terms of giving contrarian views or thinking differently. That such groupthink has affected the decision making of countries is evident from quite a few examples. In 2008, at a time when most of the world was gripped by a recession, oil prices saw a steep hike as most of these funds had bought oil as a hedge against the credit crisis in the US. This created a distortion because according to logic a recession should have translated into lower commodity prices. The recent talk on Fed taper has also impacted the economies of emerging markets. This is because most funds have withdrawn money from these markets in droves. And this has kept the central banks and policymakers on their toes in terms of managing currencies. It is a worrying issue if a few big fund managers influence the decision making of policymakers. In such a case, a change in the business models of fund management companies could be one way of addressing the issue.

The Indian share markets traded well above the dotted line throughout the day. At the time of writing, the BSE-Sensex was up by about 230 points or 1.14%. Stocks from the capital goods and banking spaces were amongst the top gainers, while those from the information technology and healthcare sectors were amongst the least favored. Mid and smallcaps were in favour as well with their respective indices up by 0.7% and 0.8% respectively. Stock markets in other parts of Asia ended the day on a mixed note with China and Hong Kong down by about 0.5% and 0.1% respectively, while Japan ended higher by about 1.5%.

 Today's investing mantra
"There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested - there's never any cash. It reminds me of the guy who looks at all of his equipment and says, 'There's all of my profit.' We hate that kind of business." - Charlie Munger

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10 Responses to "India's unrelenting food inflation problem"

Chittranjan Bhatia

Nov 27, 2013

India's current population growth rate is higher than the food productivity growth rate. It is not possible to bring additional land into cultivation without clearing of the forests. Clearing of forests would have highly adverse environmental effect. In reality, India has exceeded its carrying capacity which the ecologists define as the population of humans and animals a land area can support. As long as the population continues to grow - the food demand would increase leading to higher cost of food.


hari Prasad Gupta

Nov 27, 2013

Yes it is true that Vegetables prices are increasing regularly and crossing 10%.But it is also true that due good economic growth of the general population of the country the consumption of the Vegetables have been increasing but the Production is not increasing communsrate to consumtion and that is why this inflation.More vegetables have to been grown by farmers and proper infrastructure build to control the unnecessary wastge and loss to farmers.


Sudhir Potdar

Nov 26, 2013

Food inflation will never come down in the near future.
Well people of India know this fact that this inflation
is artificially created is sheer nexus between
politicians and traders. In the today's Times of india
Traders have given reason for price rise in Tomato is
cyclone Helen hit in Andhra just 2 days before... Matter
of fact Tomato's arrive in city mainly from Gujrat and
not from A.P. ... such dishonest, selfish traders
control supply of veggies all over India, What one can



Nov 26, 2013

Eq.Master team,
On the issue posed :: “ India’s Un-relenting Food Inflation Problem ”,
with utmost humility I observe as under:
Two apt analogies emerge in my senile mind that are recited hereunder:
The Crabs in the Bucket : and The Frog in the water kettle!
I) “ THE CRAB MENTALITY ” : There are many crabs in a bucket. But if ,however, a crab slowly attempts to climb to a higher position, all other crabs will pull it down! (same is the case in our country as is generally seen !! in any matter of national importance.)

If you throw a frog into a kettle where water is boiling it will
Instantly jump out and escape certain destruction!

On the other hand ,however,if you put the frog in the kettle with water at normal room temperature and slowly heat the water, the frog will continue to remain there without making any effort at all to jump out until the water starts to boil and ultimately perish therein !!

The case with the Indian scenario of food inflation is exactly synonymous with the case of the water kettle and the frog inside and the water is getting slowly but steadily heated up just as the food inflation rises steadily by the day as eloquently brought out in your phjrase thus ::India facing "Grave Economic Danger "????

I hasten to conclude !!



Nov 26, 2013

Not in the near future. There is no government today, no policies and it appears that none of the political class is bothered about the common man. All busy only to fill their pockets. Unless some revolution comes in India nothing will change.


Devadoss Eswar

Nov 25, 2013

Of all the sections of your news letters, I like the final one : Today's Investing Mantra ! : I am plesantly surprised to see that you take pains to even provide the web-link to the authors /ref !! It is amazing and highly interesting !!
I wish you more and more readership and success !!!

Devadoss E
40/175, I Puthen St.Manacaud P.O.



Nov 25, 2013

It is an absolute tragedy to have such a govt that is taking this country and its people into the ground with its gargantuan public policies: farm waiver bill, food security bill and NO party can touch/reverse these policies because of vote bank politics.


praveen Kumar verma

Nov 25, 2013

I think no still the Food prices will go up


Yogesh Jesrani

Nov 25, 2013

Such a high rate of food inflation for the last five years is disturbing. This in a country where millions are below poverty line is a shame. Look at the United States. Food inflation is negligible, almost non existant. The common people can get all the food and milk and daily necessities at very reasonable prices. They spend a small percentage of their earnings- even the common people- for food. This in a country which is the largest economy in the world. Compare it to India where food inflation is in double digits year on year with no respite. If governments cannot ensure stability in food prices what other comfort can they provide to the common people. It is not good that a country which has the growth in the number of billionaires cannot give food and daily necessities at stable and reasonable prices. We have the world's largest production of milk and yet milk has become so expensive that the poor cannot afford it !



Nov 25, 2013

The region wise vegetable yield is not discussed. In fact majority of agricultural lands around cities and towns had already been converted into housing Plots. Add the erratic climatic changes had affected the agriculture. The availability of labour for agriculture had been seriously affected Government's minimum assured wage. The practice of maintaining seed by the agriculturist family has been demolished. we have carried out all acts affecting the agriculture systematically .

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