Record harvest but no money to pay for it... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Record harvest but no money to pay for it... 

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In this issue:
» Does India have room for further interest rate hikes?
» Demand for water is set to grow by 5 times by 2050
» Indians spend more on education than on food
» Does India really need another environment regulator?
» ...and more!

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00:00
 
Just last week, the ministry announced that this year has witnessed a record-harvest of grains. But unfortunately the country's main grain buying agency, FCI, cannot buy the grains from the farmers and distribute it to the country's people. Why not? FCI does not have the money for it.

As reported by a leading daily, the FCI has already twice stopped payments to state governments and other agencies and rice millers who buy wheat and rice in the past month. Unfortunately, if the situation continues as it is, then the FCI would have no money to buy any grain in August or in September.

Currently around 99% of the grain produced in India is bought by FCI (Food Corporation of India). And this is entirely funded by the government's subsidies as FCI has no alternate source of income. At the same time, FCI has to buy the grains from the farmers because it cannot legally refuse them. And on top of this, it has to pay a salary to its employees, pay interest charges to the banks, freight charges to the transporters. The situation would not have been so serious had the government not defaulted on its subsidy payments to FCI. In fact, the subsidy defaults have actually grown by a whopping 800% over the last six years. So it is little wonder that FCI is facing such a severe cash crunch. And on top of this, the government continues to announce populist measures for the farmers that include a Rs 50 per quintal bonus to the wheat farmers. This further strains FCI's position.

So what would happen now? FCI has requested the government for Rs 380 bn in addition to the Rs 472 bn it received from this year's annual budget. If the government does not agree to this or delays the payment, the country would face serious problems. These would be in the form of huge protests and unrest from the farmers who would not get paid for their grain. And even worse, if no one buys the grain then it would just be left out in the open to rot and waste away.

Despite making populist budgets for the farmers, India still continues to face a grain crisis. Who do you think is responsible for this? Share your comments with us or post your views on our Facebook page.

Moving on to India Inc we would like to thank all our readers for participating in our poll on 'the most trustworthy company in India'. The results of the poll will be available on our site by tomorrow.

01:25  Chart of the day
 
Inflation has been a monster that has gripped most of the emerging markets in recent times. As a result, most of them have adopted tighter monetary policies to deal with this. Rising interest rates is not just common in India but also in the other BRIC nations. However, as shown in today's chart of the day, interest rates in India are still lower than that in the other BRIC countries (except for China). And this is despite the fact that inflation rates are much higher than that in most of them. So does this indicate that India still has some room to tighten interest rates further? Certainly looks like it. But will the RBI actually increase it? Let's wait till tomorrow and see what happens.

Data source: The Mint

01:45
 
If asked to name the most important natural resource at present, the unanimous answer could well be oil. Certainly, oil and energy fuel the engines of economic growth and the various wars and geopolitical tensions lend further credence to the importance of this resource. But there is another resource which is equally important, perhaps more so than oil, but which most of us have largely taken for granted. Indeed, we are talking about water. In fact, in this regard, Forbes has stated that 70% of the globe's population will live in urban areas by 2050 as a result of which the demand for water will skyrocket some 5 times. So will the usage of water. This means that countries across the world will have to come with new techniques of conserving the water to ensure that the supply does not lag demand. Certainly, companies in the water business will stand to benefit immensely from this development.

02:25
 
"Health is wealth but education is equally important" is the mantra of parents in India these days. As per the latest survey conducted by NSSO (National Sample Survey Office), people in India are spending more on healthcare and education rather than the basic needs of food and nutrition. In the last decade or so, the expenditure on food increased by about 70% among rural families and 78% among Indians. The growth in education spending is heartening though and stands at 378% in rural areas and 345% in urban ones. The percentage of Indians who consider good education as very important has also been on the rise. Spending on healthcare has gone up by 152% in rural areas and 136% in urban areas. Such a focus and commitment towards education and health needs is certainly welcome but not at the cost of nutritional needs. Thus, there is need for the government to ramp up awareness campaigns about the importance of proper meals especially for the student community.

02:55
 
Warren Buffett once famously said that you can never do one thing in economics. There are always other effects coming out of it. Indeed, the environment ministry's run-ins in recent times with other ministries perfectly illustrate what Buffett was trying to say. India is currently pursuing quite a resource intensive growth we should say. As highlighted, it cannot do so without causing some other side effects. The biggest side effect in this case could be the damage that India's growth projects could cause to the environment. Therefore, it becomes extremely important that each project of such sort be discussed threadbare so that environmental concerns are taken care of. With this in mind, India's Prime Minister, Dr Manmohan Singh, has mooted the idea of establishing an independent environment regulator. The regulator, it is believed, will help resolve conflicts of the type just discussed. The idea is indeed a good one. But will it be politically viable or in other words, acceptable to politicians? A leading daily has expressed optimism on this issue. It has argued that governance is becoming more and more technical these days and hence, politicizing the same has little relevance. Of course, politicians can step in if there are deviations from fairness and objectivity. But otherwise, the decisions should be best left to experts on the regulatory committee. Well, we couldn't have agreed more we believe.

03:25
 
Archaic regulations have been haunting the power sector since ages. Bureaucratic interferences, environmental issues and policy bottlenecks have added to the execution woes. As such, a strong reform agenda was needed to address the power issues facing the country. However, it seems that the state of Punjab has created a hindrance to the planned agenda by turning protectionist. It may be noted that the state of Punjab has imposed a cross-subsidy charge on industrial consumers that buy electricity from the neighboring state. While the move is aimed at protecting the state utility, an additional surcharge would mean that the industrial customers will have to shell out more each time they buy power from an outside state. Such kind of protectionist policies would effectively turn back the clock of power reforms as other states may also follow the suit soon.

Levying surcharge will not only make the power costlier but will also restrict free trade amongst the states. Creating impediments on allowing surplus trade of power will impact industrialization and also magnify the power deficit issues. Thus, we believe that it's high time that the interest of end consumer is placed over and above that of state utilities.

04:40
 
In the meanwhile, after opening the day in the red, the Indian stock markets have now moved upwards and are currently trading in the green. At the time of writing, the benchmark BSE Sensex was up by 64 points. Among the sectoral indices, the stocks in the auto and healthcare space were the biggest gainers. Most of the major stock markets in Asia have closed the day in the red. China, Korea and Hong Kong were leading the pack of losers. The European markets have opened in the red as well

04:55  Today's investing mantra
"Sell a stock because the company's fundamentals deteriorate, not because the sky is falling." - Peter Lynch
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17 Responses to "Record harvest but no money to pay for it..."

Ashu

Jul 28, 2011

One possible solution is treat FCI as a PSU. Give it some power of planning and execution.

Like 

D. Suresh Kumar

Jul 26, 2011

If the government does not have the money to buy the food grains where does the money come for the huge scams that they are doing. The members of parliament and ministers can be given a default for two months then they will realise the gravity, cut back the subsidy given to the poor Indian MPs food canteen and ask them to buy in the open market and they will really feel the price rise and how the common man suffers

Like 

VINOD MAHAJAN

Jul 26, 2011

I think the best way would be to involve private parties to build storage capacity.it is the shortage of storage space WHICH IS RESPONSIBLE FOR THE ROTTING OF FOOD GRAINS.WE ARE PALNNING TO SEND MAN TO THE MAOON IN INDIA AND WE CAN NOT CONSTRUCT STORAGE SPACE FOR FOOD GRAINS.IT IS ONLY AFTER THE PARTICIPATION OF PRIVATE PARTIES THAT THE ROAD CONSTRUCTION WORK HAS PICKED UP.
IT IS HIGH TIME THAT THE GOVT. ENTRUSTS THE CONSTRUCTION OF STORAGE SPACE TO PRIVATE PARTIES AND GIVE THEM REASONABLE RENT.IF ONE CALCULATES THE VALUE OF GRAINS LOST DUE TO ROTTING AND COMPARES IT TO THE RENT PAID FOR STORAGE SPACE,IT WILL BE PEANUTS.

Like 

Sanjay

Jul 26, 2011

All governments in India loudly claim to be supporting the cause of farmers saying it is an agrerian economy, however none of the policies are directed toward agricultural growth.

Subsidies as such do not bring long term benefit to the country and its people, and in a country like India, most of the subsidy do not reach the intended people. In such conditions subsidies in fact back-fires the poor farmers/ common man in the form of inflation - "there are no free lunches in this world" - remember this phrase..

Any govt. who is really interested in developing our agri economy should bring out meaningful changes:
a) Irrigation
b) Increase productivity
c) storage
d) supply chain management
e) research
f) all of the above can be achieved by "corporatisation" of agricluture.

Like 

S Bhattacharya

Jul 26, 2011

It's time for Dr.Singh to bid goodbye to the post of prime minister. He has bid his time on the seat for far longer than he deserves to do so. The more he sticks to his seat he will jeopardise his reputation or, whatever is left of it. He is supervising upon a bunch of corrupt ministers - the modern day versions of 'Mahmud Ghazni's and 'Nadir Shah's with a queen bee at the helm of affairs who has questionable antecedents. She is legally still a citizen of a foriegn land. Her son has a foriegner in his house, perhaps whom he will eventually marry. How many Indians would prefer to have such a family as his/her immediate neighbour ?
Raja couldn't have done what he did without the full knowledge of the real bosses in the government and without passing on the cut money to them. The same applies for Kalmadi and others.
Do we really need this blistering pace of lopsided growth ? The farmers are being deprived of their lands, food grains are not reaching the hungry mouths, inflation is out of bounds and we are still talking of GDP growth ? Much of this growth is being contributed by the service sector and the poor have nothing to do with it. It's a sector with white collar workers serving the rich and the powerful. The poor is still dependent on agriculture and the small & medium scale manufacturing sectors. Both these sectors are facing the abject apathy of the ruling class. Obviously, so. These sectors can't provide them the loot money. So, the poor and the marginalised can wait for perpituity and let them (politicians) loot to their heart's content without even bothering what they would do with that money.
You see, you have Bill Gates on one side declaring that his money is no good for his sons and on the other side we have these plunderers and blood suckers in the land of Gandhi stashing away their money in the foreign shores for the future use of their nincompoop progenies!

Like 

RADHA

Jul 25, 2011

Our Indian democracy is almost similar to the dictatorship of Gulf COUNTRIES- they donot want the farmers to really become economically independent- this will give education to many and these poor farmers will then start asking questions. This is not good for the politicians-
If the agri. minister is serious abt agriculture , then something might happen- he is busy watching cricket matches and enhancing his 'wine wealth" with Mallya. we should improve storage facilities, allow farmers to sell directly to distributors- Instead of fixing the price, if the govt can give soft loans to farmers for keeping the grains in godown , eliminate middlemen, not only the farmers, even the poor Indian public will stand to gain

Like 

vijay

Jul 25, 2011


Gov procuring paddy and wheat through FCI for food security bill. For Food security bill gov wanted to at least 65MT its seems. Gov need to be take pre steps like increasing MSP rate, storage , funds so that this type of problems will not come More over gov stopped exporting surpluse rice to other countrices. How can farmers will survice .........? I think food security bill going to be insecurity bill. Andhra farmers intiated "crop holiday" Please allow rice another 5MT untill wheat price rise.

Like 

Adi Daruwalla

Jul 25, 2011

Record bumper Harvest, wah wah wah wah, now what do we do with it? Let it rot anyways because First FCI does not have money to buy, even if it did then it will not have enough place to store the same. The dog catching its tail story but it has place to store liquor bottles of third parties in its warehouses WHAT A BL---Y CONTRACDICTION AND HEIGHT OF HYPOCRISY. WHAT HAPPNES TO THE PDS SYSTEM THAT IS TO DISTRIBUTE GARINS TO THE POOR, GIVE RATIONS TO ALL THE WHITE CARD HOLDERS ALSO THIS YEAR AT A PREMIUM AND UTILIZE THE FUNDS WELL TO BUILD MORE GRANERIES AND WAREHOUSES FOR STOORAGE AND DITRIBUTION. WHAT WERE THEY DOING SLEEPING WHEN THE LAST YEARS ACCOUNTS WERE PRESENTED THAT THERE WOULD BE A DEFICIT THIS YEAR???? ARE WE BORN IN ALIGARH OR WHAT OR THEY THINK EVERYTHING IS LIKE THE JOKEPAL, JOKEANAJ, JOKEPHAL MANTRI KO KUCHAL UNDER THE BAIEL KA HAL. OR BETTER STILL UNDER THE TRACTOR ALL 537 OF THEM SITTING IN PARLIAMENT. AND THE REMOTE CONTROL INCLUDED.

Like 

kaycee

Jul 25, 2011

Sonia's NAC is going ahead with near universal food guarantee while the enlightened pro-PDS chaps want Universal Food Security.

Simultaneously we have the situation of Govt not paying FCI for the commitments that are less than pre Food Security Act days.

This crisis created is a fit case for someone to file a PIL with Supreme Court.

Dr Singh's Govt have gotten into the habit of acting on anything at all, only if the Supreme Court slaps on UPA Govt's face, be it trying to track CWG swindlers or Black money hoarders or seriously going after the original 2G looters aka members of ex ruling family of Tamilnadu and not just the tool, A Raja, planted to plunder (and pass on to the bosses and ofcourse take his commission), distributing free the grains otherwise rotting in ill maintained godowns or worse still, in the open, kicking out tainted CVC where the fact that he was tainted (be it past taint of current, its too serious to ignore as the post is supposed to the hyper-super-cop of Administration) was well known, prior to CVC's appointment, to the (sloppy) powers that appointed him.

Election commission should seriously look at the possibility of allowing the people to unanimously elect the 19 Supreme Court Judges as Union Ministers for a fixed 5 year term Govt, headed by Mr SH Kapadia, kicking out the Doctor! We shall have some delivery, for sure, compared to the no-good Union Ministers like Alagiri & TR Balu & the host of faceless besides useless MOSs of The Great Coalition Dharma, draining the exchequer with the freeB s that include free unlimited domestic air-travel for the spouses/mistresses!

As a side benefit, a small bench of Supreme Court err new Union Ministers (let us take a leaf literally from the tree of GOMs of the Doctor, pushing papers, if they are pushing anything at all and appoint A GOM under Justce SHK!) may be appointed as special GOM to exclusively focus on jailing the vast majority of Union MInisters, Chief Ministers, MPs and MLAs to a term of 5 years and ofcourse a few top babus colluding with them (who together are all swindlers), so that India regains what it should have attained in the past 40+ years, during those coming 'empowered 5 years'!

Oh boy! How I wish that, the reality be as simple as that, to find a solution to ALL the problems of the Country, created by these well known swindlers!

Like 

Chetan Bhatia

Jul 25, 2011

Of course our political & the bureacratic system. If our politicians & babus are such bad managers & leaders who can announce freebies & cannot manage the supply chain & finances, let it become a penalty for the political party which announced the same to bear the entire loss.

Let the CAG publish the loss annually done due to such acts/announcements & the person & party responsible for it.

Its high time we make individuals & parties accountable & responsible to their acts. It's high time we bell the cat.

Like 
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