Is it time India be called an Onion Republic? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is it time India be called an Onion Republic? 

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In this issue:
» Co-operative banks are a money laundering tool
» Debt write offs triple for Chinese banks
» India braces to increase FX reserves amidst QE taper
» 2013 stock rally is a tribute to the Fed
» ...and more!


00:00
 
Onion prices have just breached the century mark! Yes, it is priced at Rs 100 a kg now. In fact, onion breaching the century mark has brought tears to the eyes of common man. You may be surprised to know that prices of onion, mostly widely consumed vegetable, has increased four times over the last one year! And this has happened in a country which is the largest producer of onion in the world. It is probably high time that critics of India's political mess like Ratan Tata who earlier called the economy a 'Banana Republic' now call India an 'Onion Republic' instead!

If prices continue to rise at the same pace there may be a time when onions would be used as collateral! Extended monsoon is the primary reason why prices have increased. Prolonged monsoon has damaged the crop and reduced the supply. This has led to increase in prices. And when supply was reduced due to natural reasons stockists have resorted to hoarding further creating an artificial scarcity in the market. This has given further fillip to prices.

And the irony is that our government has been able to do nothing against the hoarders except for giving them warnings. There has hardly been any crackdown on the hoarders. Further, with prices rising farmers are also holding on to their stocks to benefit thereby leading to further artificial shortage.

In order to capitalize on natural shortage a capitalist economy has made a mockery of vegetable prices. And when capitalists are making profits why should politicians stand behind and not seek to benefit.

Remember, onions are a ticket to 10 Janpath. Being the most widely consumed vegetable any increase in prices directly affects the common man. This becomes a talking point for the opposition to blame the incumbent government for its inability to curb food inflation. This way they try to seek political mileage. And this is what is happening at the moment. Hence, the food minister, K V Thomas, is seen making trips to Maharashtra, one of the top onion producing states. Now it remains to be seen whether his trips will bear any fruits on onion prices.

More importantly, onion prices are just indicative of the steep rates of inflation that have been taking a toll on cost of living for the common man in India. The government's unwillingness to tackle the inflation problem upfront could deal a blow to the 'consumption theory' for the growing middle class population in India. And that would ultimately bring India's economic recovery to a staggering halt.

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01:45  Chart of the day
 
The gas energy sector in India has been facing rough weather for quite some time now. Falling domestic gas supplies, rising share of costlier imports and controversies on gas pricing remain an overhang on the sector. And as if things were not bad enough already, there is yet another news that makes India vulnerable on energy security front. Reliance Industries Ltd (RIL) has drastically cut its estimates on D1 and D3 gas fields in the KG-D6 basin. These are the same fields that were hyped as one of the biggest gas discoveries in India few years ago.

What is shocking here is the extent to which the company has cut estimates. As per an article in Business Standard, earlier the company had upgraded the estimates on the same fields by around 2.6 times. However, the latest estimate suggests an 87% cut. Reliance Industries Ltd has been under delivering since past three to four years. As per the production sharing contract, the fields were to supply gas till 2029. But with the recent revisions, the contract seems unlikely to be honoured. In fact, the wells are now unlikely to continue producing beyond 2022. There are further doubts if the company has been gold plating costs and suppressing gas production from the block as current gas prices are not attractive enough. It was on the basis of initial estimates and commitment that a critical resource of national importance was given to the company. However, now it seems that the interest of the entire nation has been compromised for private gains.

Production at KG D6 may not extend beyond 2022
Data source: Business Standard


02:05
 
It was not too long ago when the Cobrapost expose revealed the murky nature of customer verification in Indian banks. Even those featuring in the league of the biggest PSU and private sector banks were accused of failing to adhere to KYC guidelines. The expose in fact gave clear evidence of bank employees colluding with customers for money laundering. The RBI's independent audit failed to put a number to such instances of money laundering. In fact deputy governor Chakrabarty even dismissed the possibility of systemic risks. Hence it comes as a surprise that FM Chidambaram has himself pointed out at more risks in the system. According to him, the innumerable cooperative banks in the country act as breeding grounds of illegal money laundering practices.

Initially there were just handful urban cooperative banks (UCBs) in urban and semi-urban areas. However, currently there are 1,645 UCBs across the country, with more than 8,150 branches. These have Rs 2 trillion worth of deposits and advances to the tune of Rs 1.3 trillion. Given the size of their operations strict regulatory control is a must. However, the key problem is duality of control. The RBI controls just the depositing and lending practices. Bulk of the functions of the UCB's are government-controlled through the multi-state cooperative societies. Thus the leakage of governance and regulatory oversight has led to poor health of the UCBs. It is time that the RBI takes a serious note of the problem, consolidates the operations of UCBs and shuts down fraudulent ones.

02:45
 
Remember the last time there were fears about a possible Fed tapering Well, our policymakers are not likely to forget the event in a hurry. For that's when the rupee went into a free fall and touched an all time low. Well, if a leading daily is to be believed, the Government seems hell bent on avoiding a repeat of the entire drama. It is looking to have a US$ 300 bn war chest ready in case the tapering eventually takes hold. Of course, it's a different matter that a lot of experts including us believe that tapering in the near term looks a very remote possibility.

Nevertheless, India's efforts are laudable and show that it is willing to learn from its mistakes. However, what would please us more is a structural change in India's trade balance rather than the short term fire fighting we have so gotten used to doing. Yes, we do need to build a war chest. But they should come more from the excess of exports over imports in place of the current dependence on capital inflows. A sustained rise in the same is perhaps the only way to ensure that our currency remains strong. And is not susceptible to events like US tapering.

03:15
 
The rate at which debt burden has been piling up in China is alarming. Just yesterday we talked about how the debt time bomb is ticking in China with the specific reference to local government debt. Now, here's another story we came across in Bloomberg which reiterates a similar grim view. It says that the bad loan write offs by the biggest Chinese banks have tripled in the first half of this year. The top 5 Chinese banks have written off an aggregate debt of 22.1 bn Yuan (US$ 3.65 bn) in the first six months. Just a year earlier, the write offs stood at 7.65 bn Yuan.

The only silver lining here is that the banks appear to have made adequate provisions for bad loans in earlier periods. As a result, the current profitability has not been hampered. The Chinese bank regulator has been urging banks to set aside more funds to take care of defaults and also to write off bad loans. While the Chinese banks are still enjoying the credit boom, if the rise in defaults gets out of control and if growth slows down significantly, then there could be big trouble for Chinese banks.

04:05
 
The rally in the US stock markets in recent times has only served to highlight how out of touch it is with ground reality. Indeed, US stocks have already risen 21.5% this year. In sharp contrast, earnings growth of corporates has been rather tepid. As per an article in Moneynews, Wall Street's earnings estimates for the third quarter are beneath the second quarter's actual results. Looking at it in another way, average earnings per share for the S&P 500 have dropped from more than US$ 30 to less than US$ 27. However, the S&P 500 has ascended more than 10% during the same period. All of this just goes to show that the rally in the US stock markets is more speculative and is not relying on fundamentals. The latter continues to remain weak. Thus, as long as the Fed keeps pumping more money, it will hardly be surprising if stock prices continue to rise. That is why the US Fed is stuck in a trap. Based on fundamentals alone, US recovery, if any, will be sluggish. And so it will be difficult for the Fed to taper off QE, as various asset prices fuelled by this excess money will crash. It will be interesting to see how long this state of affairs will continue.

04:30
 
In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 241 points (-1.18%). All the stock indices were trading in the red. Realty and Power stocks were the biggest losers. All the Asian stock were trading weak led by China and Japan. The European markets also opened on a weak note.

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11 Responses to "Is it time India be called an Onion Republic?"

R GURURAJA RAO

Oct 26, 2013

The rise and fall in any commodity depends on several factors including environment. To tide over the situation is to use the commodity economically or stop using/switch to alternate product till the prices ease/fresh stock arrives. GROW MORE FOOD CAMPAIGN is the need of the hour.

Like 

satish dabholkar

Oct 25, 2013

About the rising prices of Onion in Mumbai,I have got the information from vendors that though new crop is arrived the prices of onion has not came down because in wholesale mundi,Vashi, the place were auction of onion take place,the workers who pack the vegetable Lot in say 100kg or 50kg basket deliberately keep 4,5 kg onion less in the baskets,and compel the buyers to pay the price for 50kg by their (dadagiri) power as per auction. Naturally the retailers are not able to reduce the price for onion as they have got lesser quantity.But the record of Mundi shows price of lower rate and it is not passed to the consumer.All these things should be investigated and Government should take strict action for the benefit of the common man in Mumbai.

Like 

Khazan Singh Singhwan

Oct 24, 2013

India's poor normaly feeds himself not through exhaustive menu but only through Roti-Pyaj [pyaj means onion]or Roti-Chatni. Ingrediants of chatni necessarily are chillies, salt and onion. Hence poor men's thali [plate] demands presence of onion in whatever form for lunch as also dinner. The poor hardly have time and resources to take breakfast. If they feed themselves before going for work, then it becomes 'brunch'. In any case the poor hardly takes two meals a day. Without onion, their thali looks a widow since they cannot afford to have a vegetable as a dish to accompany the roti. A vegetable / dish requires oil, spices [other than chillies]and garlic or onion for pungency which makes their thali still costlier and hence un-affordable.

How about middle income and creamy layer population of the country which of course is in minority. They need still higher quantity of onion for adding to their veg / non-veg dishes and as 'salad'. Green salad is never complete in the absence of onion. Think of a function where food is being served and one cannot think of buffet without salad [onion] besides onion being used to cook various dishes.

Another important aspect is the use of onion by all the population of the country without exception, be they hindu, muslim, sikhs, christian etc etc since our Government is always concerned about us on the basis of religion /casts etc.

In my opinion, onion is used by almost entire population of the country and throughout the year. If we cannot ensure availability / supply of such an important item of eatables at reasonable price then Govt would have tough time justifying its existence. I find time not very far when following may happen:

[1] Dowry hungry people [in majority in India] would start asking for huge quantity of onion in dowry which poor can't afford and they would find their daughters' [whom we worship at least in Navratras] marriage difficult.

[2] Banks and financial institutions would stipulate 'collateral security' by way of hypothecation / pledge of a particular stock of onion which first generation entrepreneurs may find highly difficult to arrange. Now banks / FIs are satisfied with collateral by way of house / property of the borrower / relatives which could be arranged in one or the other form. But how one would arrange onion which is already turning into a scares commodity. Besides, maintaining a particular [measurable] stock of onion throughout the currency of loan as security would tentamount to exclusion of such stock from supply of onion in the market which would further increase the rates of this wonderful commodity.

[3] Not only the traders and producers of onion would like to store / hord its stock to get better commercial value but even the general public [consumers] would endavour to accumulate and store onion for their consumption in future / times of scarcity which would limit its supply in the market and the prices would shoot up.

[4] Such storage of onion in almost every household might bring change in the climate since their would be pungent smell everywhere. Since I am not a science student, I find myself incompetent to forecast what impact it might have on global climate / environment. Could there be a threat like the one earth is facing from particularly gases.

[5] To avoid the entire environment smelling because of storage of onion in each household, India need to create adequate storage capacity for onion which could be taken on rent / lease by the horders / bank borrowes / farmers / general public. Transport infrastructure including roads would also need to be created for transportation of onion inter and intra states in the country. Does India has required resources to create such storage and transportation capacities on pan India basis. We waste huge quantities of agro and fruit produce every year on this count. India lack technological, starage and transportation infrastructure for proper utilisation of her agro and fruits produce. In this backdrop, how onion can be stored and saved from wastage.

The more I think about onion, various dimensions emerge in my mind. Some of these give shivering sensation and I am afraid I cannot continue my commnets on onion any further. Hence I stop here and wish my contrymen 'all the very best and availability of onions for every at reasonable price'


Like 

pc sah

Oct 24, 2013

Even in this twentyfirst century , the poor planers of India have miserably failed. They prompt politicians to lambast India to be a world power but at the second instance fail to realise the basic fact that India still is an agrirarian country where still a lot depends on production of rural economy (GDP growth). Past few years trend of growth have created a situation where a roti-salt eater became a onion-roti eaterand so on a subjji-roti consumer has adopted roti- murga diet. But overall supply side constraints have not been overcome. A single seasonal crop failure/ disruption causes panic & distortions. So India has cased itself into a separate class of management and economy which can rightly be called onion republic, perhaps a shade better than many banana republics of world

Like (1)

krishnan

Oct 24, 2013

we have one of the most useless agricultural minister.He allows millions of tonnes of food garins to rot year after year ,also repeatedly allows onion to be exported leading to shortages,does not have plan to store food grains so that both farmers and consumers get reasonable prices,does all to help the middlemen mint crores on the sweat and toils of the farmer s and the consumers and not but least sabotaging the the present govt as he himself wants to change sides

Like (1)

R.Ramesh

Oct 24, 2013

What to comment on useless, inefficient and currupt Govt. God only can save this country!!!!

Like (1)

c.m.panicker

Oct 23, 2013

This only shows that the goverment has no consistant policy in tackling the foodprice inflation.Increase in price of essential food items has to be checked by constant monitoring and proactive actions.Because elections are nearing,if at all any action is taken it will only be kneejerk reactions and the situation will be back immediately after the elections.What we need is action to find solution on long term basis.Will our politicians think about it and initiate actions.

Like (1)

H K Prakash

Oct 23, 2013

Aarey bhai, every election, onion is manipulated so that traders are benefited and can pass on "election lado" paisa to benefactor. Why onion? Easily manipulated, Lasangaon in Mah is biggest and can easily control price by controlling releases, 100 excuses can be found (too much rain, little rain, untimely rain, too much sun) No farak which party, all need money: Pseculiar/ BSP/ Mullah/ Ladoo/ Sham-ata/Sinha/ Bajapa? What's different this time?

Like (1)

Gangadharan Nair

Oct 23, 2013

If there is shortage of ONION, Mr. Sharad Pawar will import it from China @ Rs.20/- per Kg. and distribute it for @ Rs. 100/-. If there is an excess then he will procure it @ Rs. 20/ per Kg and export it for Rs. 100/- kg. As long as UNDER INVOICING and OVER INVOICING is active Mr. Sharad Pawar will make money in both conditions.

Like (1)

Ashish

Oct 23, 2013

Analytic and thought provoking articles especially three - onion republic, UCBs & debt piling in China. Reading the first it seems politicians, I mean the administrators of the Country are busy in collecting donations from the hoarders I mean businessmen for the ensuing election as common men do not believe them & will not donate a single farthing. Present case is a win win situation to both these classes. Cases of 'Reliance' does not attract any attention from us as we all know every time opposition blames ruling party for nexus with 'Big Brothers', whosoever in power throwing mud to other and 'They' remain unaltered with ultimate goal of making more and more profit. Recent example is the case of 'Delhi Airport Metro' which they abandoned without citing enough reason. Anyway Govt. is there to rescue without charging penalties and commoners are there to suffer.

Like (1)
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