Will this solve India's food problems? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will this solve India's food problems? 

A  A  A
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
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13 Responses to "Will this solve India's food problems?"

Kranthi Mark

Mar 12, 2012

Its Good Idea to allow Indian Individuals and corporates to acquire farm lands at overseas locations . Because of plenty of land available in countries like Madagascar , Kenya, Nigeria and Etopia. But govt need to identify the reason why India has look out side , the key reason is because of real estate boom except major forests which are not under cultivation or controled by forest majority of cultvating farm land is turning from food basket to gulf courts , real estate plots , swimming pools or industrail muscle SEZs. By allowing farming at overseas is government is going to allow 100% agricultural commodities imports ?? ...since out side productivity is hign when compared with India ??. whats the road map ahead . Bureaucrats in india simply sitting and sharpening their pencils ... they need identifty the longterm fundamentels and policy implications !!

Like 

JS. GOGIA

Mar 7, 2012

Capt. Gopi Nath is hinting at the mis management and not understanding the core business of airline.In this case , you make Mr. Gopinath as MD. and let the bank turn debt into equity. The experiment will not be bad. Give it a trial.After all, this situation has not come overnight. It is the creation of years' mismanagement.

Like 

J.S.GOGIA

Mar 7, 2012

It makes no sense to hire land or to take cotractual farming out side the country. We have huge track of land .We have atleast five time more potential with the present technology available with us. The dire need is to consolidate the fragmented the holdings to make it viable for modern cultivation and to harness the water resources at national level.No govt has taken it seriously. Our investment in agriculture is the minimal. Where is the implimentation of garland canals of K.L. RAO PUT IN 1970 'S. it is gathering dust in planning office.

Like 

sarat palat

Mar 7, 2012

First of all the real problem which led to this condition of Kingfisher to be checked and verified. All of us are aware that most of the airlines are in red. So replacing Mr. Mallya might not serve the purpose. Moreover, what expertise banks have in running an airline industry ? Most of the Indian public sector banks are not that efficient in their own field. Converting their debt into equities is a good idea. They could be the major share holders. But, the operation part should be handed over to professionals.

Like 

MAK

Mar 7, 2012

Actually, many banks are responsible for the financial mess of many corporate or business entities. What is the logic of financing funds so much that it is unrecoverable?

Bank are financing funds without proper analyzing the need for funds or favoring some entities for their vested interest. Advancing loans much more than is genuinely required.

Even the controlling Banks and Financial Institutions are mute spectators. They are all enjoying high pays and salaries and throwing big money in parties, functions and unnecessary travels and trips and five star luxuries in hotels and resorts. Why actions are not being initiated against the erring officers?

Public money is being misused for ulterior motives. Poor depositors are snatched away of their share or reasonable interest which does not even cover inflation rates.


When passengers are always paying for their air travel ticket in advance, which should cover all the business expenses and keep a margin for profit, why the Airlines should not pay fuel charges in advance. Has airlines giving free rides to some people who have favored them?

Besides very high salaries, perquisites, luxurious and wasteful expenditures are responsible for business losses.
Banks must use all the financial tools and monitoring system for their advantage.

Banks must finance only up to minimum requirements to all such sectors be it airlines or any business entity.
The advances to constructions industry is leading to high cost of flats, beyond the means of common man. Whereas buyers most of whom avail of loan amount and own contribution normally pay a lot of money in advance to builders leading to double financing.

Let us hope authorities will take immediate steps to save public money and reward the not only the share holders but also the depositors, without whose support banks cannot function for even a single day.

Like (1)

TAK

Mar 6, 2012

India's food problems are best solved by controlling the sale of sugar and declaring it a controlled substance like alcohol. After all both are equally toxic and have terrible effects on health. Sugar consumption also results in land being used for sugarcane cultivation that is also very water intensive. The freed land can be diverted to grow pulses and grain.
Controlling sugar (not the sugar industry) would also save billions of rupees that are spent by Indians on metabolic diseases like diabetes and heart disease.

Like (1)

HP

Mar 6, 2012

You say :"But rather than just meeting targets, our hope is that banks will work harder on actually uplifting the weaker sections of our country." Seriously? Is this the job of private sector banks? Priority sector lending is just another way in which the govt. is wrongly delegating some of its responsibilities to banks.

Like (1)

vsvenkatasai

Mar 6, 2012

Mr Mallya failed to take remedial measures though red signals were indicated long before. no serious appliction of mind. time to quit avition activity for Mr Mallya.

Like (1)

pinakin m

Mar 6, 2012

simple but practical solution: hand over the management of Kingfisher airlines to the only profit-making private-sector airline in India: Indigo. No interference, no nonsense by others when Indigo goes about turning around KFA. Period.

Like (1)

Suresh Kumar

Mar 6, 2012

Mr. Mallya does not seem to have a long term plan. In last 5 years, the losses of Kingfisher have been increasing year-on-year. The board also seems to be clueless. There is no operational expert on the board.

Captain Gopinath is probably right that banks should convert the debt to equity and go for a change of board altogether. There is lot of similarity in terms of financials between Kingfisher and Air India.

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