Food Security or Vote Insecurity? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Food Security or Vote Insecurity? 

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In this issue:
» Do present times bear similarity with pre-World War I period?
» Oil prices down 30% from peak, yet India paying more...
» New service tax rule to ease cash flows of IT companies
» Is the Chinese Yuan ready to rival the US dollar?
» ...and more!


00:00
 
"Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime."

This simple yet profound Chinese proverb emphasizes the importance of empowering people to become self-dependent by building capabilities. Providing temporary support is no solution to a problem, unless it is a crisis that needs to be addressed. But this very vital lesson seems to be lost on the UPA government. We saw the proof when the Union Cabinet cleared an ordinance yesterday to pass the food security bill.

Let us quickly brief you about this ambitious bill which is about to become the biggest food security programmes in the world. Under this programme, the government will supply 5 kg of rice, wheat and coarse grains at highly subsidised prices of Rs 3, Rs 2, Re 1 per kg, respectively, every month. About 75% of the rural population and 50% the urban population would be the beneficiaries.

The first question to be asked is: How much will this programme cost? As per DNA, the food security programme is likely to cost the government a whopping Rs 1,250,000,000,000 (that's Rs 1.25 trillion) every year! Where will so much money come from? It goes without saying that India's fiscal deficit is set to worsen.

The second question is: What long term value will this programme create? The answer is nil. On the contrary, the damage to the country's finances would be almost irreparable. Moreover, there is huge opportunity cost involved. The same funds could have been utilised to build long term assets and capabilities in our country.

We came across an article in the Wall Street Journal that highlights exactly this point. For instance, about 50% of the beneficiaries of the programme would be farmers. Would providing them cheap food really solve their problems? Not at all! Another thing that we must not forget is the miserable state of the public distribution system, where leakages and corruption are rampant. It would be too optimistic to assume that the cheap food will efficiently reach the needy population.

As you would know, India's agricultural growth has remained below the government's target of 4% annual growth. The biggest hindrances seem to be lack of irrigation facilities, poor crop productivity and snail-paced adoption of mechanized farming. Given these facts the government should be making investments in agriculture research and farm infrastructure. It should be empowering farmers with technology to boost productivity.

But is the government really thinking long term? In fact, it wouldn't be too far-fetched to say that the UPA government may not even be looking beyond 2014. With the general elections due next year, the food security bill is a desperate attempt by the UPA to appease the electorate. Political ambitions, as always, reign over India's long term interests.

What are your views on the government's ambitious food security programme? Please share your comments or post them on our Facebook page / Google+ page

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01:40  Chart of the day
 
As per the recently published Global Innovation Index 2013, India ranked poorly at number 66 among 142 economies that were evaluated based on their innovation capacity and efficiency. The country that ranked number 1 on innovation was Switzerland. The US stood at number 10. As the chart of the day shows, even among the BRICS, India scored the least on innovation. India ranked very poorly on political stability (Rank 123) and ease of starting business (Rank 128) . And so was the case with knowledge and education related parameters.

However, India did perform well on certain parameters. For instance, it ranked number 1 on Computer and Information Services exports. It ranked 9th on the parameter of Gross Capital formation (as a percentage of GDP). For Creative goods exports, India stood 11th. It also scored well on parameters such as Investment in new business (Rank 20), Industrial Cluster Development (Rank 29), etc.

What does this indicate? It is clear that the India has managed to grow not because of the government, but in spite of the government. Populist and inefficient governance is indeed the biggest hurdle that India faces.

Data source: The Economic Times


02:07
 
1914. Can you think of any important event that occurred in this year? Well, it was the year when the first ever World War broke and which subsequently led to huge loss of life and property. Next year will be the year of the hundredth anniversary of this event. Thus, what better time to sit down and reflect on whether there is a possibility of another world war anytime soon? An article in Project Syndicate finds an uncanny similarity between the events that led to the First World War and the current state of affairs.

Just as there was an epic financial crisis in 1907, barely few years before the First World War broke out, the world only recently saw another crisis of even greater proportion. And just as nationalistic passions flared up back then, passions are running high this time around as well. Thus, there is a strong likelihood that destructive strategies may not be far behind.

As scary as it may sound, we do belong to the camp that attaches a high probability to this event. There have been quite a lot of nations that have spent way beyond their means. And we see no hope in them repaying the debt in the conventional way. Thus, a war looks one of the easier ways in which they can default and start all over again with a new slate.

02:43
 
It was in the year 2008 that crude oil hit the peak of US$ 145 per barrel. Since India relies mostly on crude oil imports, this had serious consequences on the import bill, fuel subsidies and the entire energy sector. Almost five years have passed since then. Over this period, crude oil prices have come down by 30%. But this has not done anything to ease our concerns. Thanks to the fiscal mismanagement, the future of the economy and energy sector seems more precarious than ever before.

The sharp decline in the rupee has watered down all Government moves lately. It is ironical that we are currently paying higher for a barrel of oil than what we did when oil prices touched the peak. This has severe implications for energy sector and fiscal health of the country. Falling rupee has bloated the import bill and is leading to higher subsidies, thus compounding the problem of twin deficit. Since currency reflects economic fundamentals, all this is likely to pull rupee further down. In short, we seem to have been stuck in vicious cycle. Things might have been different had the Government been proactive with the reforms. This is just a crude reminder that every reform has a time value. Hope the Government is learning its lessons.

03:18
 
What is the point of imposing a tax and then giving a refund? Isn't it better to give a tax exemption instead? This seems to be the underlying thought behind the government's recent decision on service tax. The decision is related to the service tax imposed on the companies that fall in the SEZ (Special Economic Zone) area.

Earlier, these units would pay the service tax and then wait for the refunds to come through. This obviously stressed the cash flow position of these units in the short term. The biggest beneficiaries of this are the IT companies. The decision is expected to improve their cash flows quite a bit. As per the President of NASSCOM, claims of nearly Rs 40 bn are pending with the government of which nearly 30% are from the SEZ area. The tax exemption would come as a relief for the IT companies which are already looking at higher tax rates in the future.

03:44
 
In the past, China was perceived to be quite rigid in its foreign exchange policy. This is because it refused to succumb to US pressure and do away with the pegging of the Yuan against the US dollar. The thinking with respect to its currency appears to have changed over the years. Now the dragon nation is quite keen on a much bigger international role for its currency. That is why plans are on the anvil to fully open its capital account. The idea is to emerge as a global rival to the US dollar.

As reported in an article in the Financial Times, Guan Tao, a director-general in the State Administration of Foreign Exchange has stated a two-step process to loosen constraints on its currency. China could accomplish basic or partial Yuan capital account convertibility in a few years. After which in another couple of years, it could announce full capital account convertibility of the Yuan. Of course, there are detractors to the same. They contend that China should not undertake this action hastily. While capital account convertibility should be the long term goal, it has to be done in a gradual manner. This is after taking into account the likely risks that such a move could pose on the Chinese financial system. We believe that the Yuan emerging as a rival to the dollar could be a bit far off as China's financial system still has many issues that need to be addressed.

04:30
 
In the meanwhile Indian stock markets continued to trade above the dotted line. At the time of writing, the benchmark BSE-Sensex was up by 130 points (0.7%). Information Technology and FMCG stocks were leading the rally. Metal stocks were the biggest losers. Barring Japan and Taiwan, major Asian stock markets were trading in the green led by Hong Kong.

04:50  Today's investing mantra
"The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time." - Charlie Munger

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    29 Responses to "Food Security or Vote Insecurity?"

    senthil

    Aug 16, 2013

    rediculous. have feeling not the fact is that right people in good country with worst politicians.

    Like 

    sudhir adhikari

    Jul 14, 2013

    Food Security Bill is all humbug. It is just an attempt by the corrupt, greedy govt. to look at ways to remain in power and continue filling the tummies and pockets of it's members. It is the least interested in bettering the welfare of the people and country. It has lost the faith of the people which would be reflected in the 2014 elections do whatsoever it may now.

    Like 

    Sathyamurthy Iyengar

    Jul 9, 2013

    Our great politicians allow the food to rot in the Godowns, and they cant distribute it properly or rather store it well. If they really wanted, they would have taken care of it, but they never did. Dear citizens!! You think this government is trying to do some thing good to you people apart from corruption and blame game? Hehehehe All the best who trust these people sitting in DELHI...

    Like 

    Sathyamurthy Iyengar

    Jul 9, 2013

    Free bees are being given by the politicians in our country as if it was from there bank account. I am increasingly agry and disgusted with these politicians. You see Tamil Nadu - They provide rice in the rashion shops at Rs.1/- per KG. Have they progressed? Will they Progress? For both these the answer is a big "NO" in quotes. It has made all the farmers lazy and they say - Why do i need to plough my feilds and grow rice, which will cost me more than the cost of rice provided by my government. Its true, why should they work. With this kind of schemes, the country will be one of the laziest country in the world. Days are surely not far from INDIA becoming like Greece, ITALY or any other country which is in real crises today. I dont know what is our great economist - PM doing? Cant he at least get up once from his chair for the people of this country? SHAME is in shame infront of our great politicians. I am sure GOD is in our country, which runs on its own. I have not seen any politician in this country thinking or working for the country.

    Like (2)

    Vipin Patil

    Jul 8, 2013

    With all these sort of stuff going on (unimaginable corruption / scandals unfolding on almost daily basis, popular policies to please voters & spoil the economy of our country and most importantly shamelessly defending all acts) will ultimately lead to (1) Disrespectful fall of UPA (2) will force people to go for extreme steps similar to Egypt / Brazil

    Like (2)

    Nandkishor Desai

    Jul 7, 2013

    IT IS RIGHT TO SAY IT IS VOTE BANK FOOD BILL TO PLEASE & CATCH THEM TO VOTE UPA

    Like (1)

    Annarao Talwar

    Jul 6, 2013

    I hate politics and hate politicians too. And I do not why . As afar as food bill is concerned its a fake card the congress is playing with poor peoples life in India to win again. Food bill just another face of money for vote.

    Like (1)

    c v krishnakumar

    Jul 6, 2013

    Mahatma Gandhi on whom the congressmen swear had this to say "The hungry millions ask for but one poem - invigorating food. But they cannot be given it. They must earn it by the sweat of their brow". He would have been aghast at the cheap tricks today's Congress play to perpetuate power. God save the country!!

    Like (3)

    Pavan

    Jul 5, 2013

    Elections are near. Large cash flows in system will be needed. Food Security Bill serve both purposes Cash as well as votes.

    Like (1)

    George

    Jul 5, 2013

    Vote Security or Food Security, the UPA is embarking on a impractical mission, which will drain the Govt. coffers, and yet result in food not reaching the needy due to the corrupt PDS in the country. Scope for another SCAM, and the wrong people making a lot of money

    Ultimately the tax payers will be burdened, as the Govt will need money to turn around the fiscal deficit

    Like (1)
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