Why US is a real threat to India's food bill? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why US is a real threat to India's food bill? 

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In this issue:
» Should activist investors pay bonuses to board members?
» Swiss voters reject pay limit proposal
» Zero rate policy of Fed to continue in 2014
» Vacancy rates hit 20% in Mumbai
» ...and more!

We have been quite vocal in the past explaining why food bill is just plain bad economics. The Food Security Bill shall increase government's share of subsidies and burden its finances. Also, the timing of the announcement (just before the elections) was seen as a desperate attempt by the government to woo voters rather than really solve India's food problem.

However, it seems that there is a threat to the food bill or rather incumbent government's tenure in Delhi, should we say. And the threat is not internal but external. Apparently, from US and EU. Both see India's food subsidy programme as market distorting.

World Trade Organizations' (WTO) guidelines cap agricultural subsidies at 10% of the production for most developing countries. And considering that India's food bill is expected to cover almost 2/3rd of the population the subsidy figure may breach the cap. This could distort the agricultural markets worldwide. US and EU fear that these subsidized food grains will be shipped outside as against domestic consumption. And this may not be in the interest of their farmers.

As such, they are opposing the India's food subsidy programme. However, India is looking to sign a treaty that may give it a breather from the WTO law. But what is surprising is the opposition from the West which itself gives farm subsidies that in value terms are at least 5 times India's subsidy program. Their mode of subsidy is different than India and hence within WTO guidelines. However, their opposition to India's Food Security Bill is something which may not have gone well with the government.

One may say that India should stand up against the dubious practices of the West; which understandably aim at protecting their trade interest. There is an argument that India's model of direct cash subsidy distorts markets. This is because government procures food at market price and sells it below that. In that case, farmer associations across the country have questioned the way the subsidies get doled out in West. Over there 80% of agricultural subsidies go to corporates. And the rationale of subsidies is to benefit the poor farmer and not corporates. Thus, there is a demand to withdraw such kind of subsidies. At least, India's subsidy mechanism benefits the poor while that in the West goes to corporates.

While the government may have turned deaf ears to such argument now we believe it will do whatever it can to get rid of this external pressure by any means. Not only because the Food Security Bill is government's primary agenda. It's also because the bill can change India's political landscape .

As we have said earlier, the Food Security Bill could seal the possibility of the government getting India's fiscal position back in shape. While the intent of the bill is sound, the manner and extent of implementation leaves enough scope for corruption. So whether it is opposition from the US or the WTO, anything that forces the government to rethink its fiscal profligacy plans is a positive according to us.

Do you think foreign pressures can create a setback to India's food bill? Let us know your comments or post them on our Facebook page / Google+ page

01:50  Chart of the day
A landmark deal between Iran and Washington has huge implications for the Indian economy. It's been quite some time since Indian crude oil imports from Iran were threatened as US and European Union (EU) imposed sanctions on oil exports from Iran to curb its nuclear programme. Iran used to be the second largest supplier to India until around two years back. But since then the sanctions have led to a decline in the oil supplies from Iran as can be seen in today's chart. Further, such developments and speculations resulted in fuelling up the crude prices.

Now that the key parties have arrived at a historic agreement, the oil prices are likely to soften. While the sanctions will still be there, as tension eases, oil prices are likely to cool down. This will mean huge relief for India with regards to fuel subsidies that are a prime culprit for high fiscal deficit. As the risks in importing crude from Iran come down, it will do away with the need for reinsurance of imports from Iran. However, the benefit is likely to get offset to some extent. Earlier, India and Iran were planning to have a mechanism for 100% rupee transactions to deal with the payment crisis that resulted from the sanctions. Now, the development may lead to end of the long standing payment crisis. This will mean forex loss as India restarts paying in dollars or euro's for Iranian imports. Nonetheless, the overall impact on Indian economy and domestic energy sector is likely to be positive.

India's oil imports from Iran
Data source: Petroleum & Natural Gas Ministry

----------- The coming crisis will be worse than 1991... -----------

Over the last few months, we've seen people trying to draw similarities between the current Indian economy and that in 1991.

And we've also seen the government taking severe pains to convince that the current crisis is nothing like that in 1991, and we won't need to pledge our gold reserves for a loan again.

Frankly, even we think the current crisis is nothing like 1991. On the contrary, it's a LOT worse!

Why do we say this? Just click here to find out.


If you don't quite like the fact that the management of a company is not doing its job, you look out for some other stock to invest in, right? Well, there are some investors out there who stay put and instead, try to change the way the company is run itself. This can be done through installing one's own members on the board of the company. Investors who do this are often called as activist investors. Their sole aim is to bring the company back on growth path and thus profit from the rise in their stock price. Now the question is, should such investors be allowed to offer bonuses to directors who they helped install on the board and are responsible for the improvement in performance?

Well, this is perhaps the most hotly debated topic in the US corporate circles currently. Those on the side of it believe that this is nothing but good corporate governance. And hence directors installed by activist investors should be paid bonuses. At the same time, there's this other group out there that simply does not favour the idea. Their contention? Bonus payments by activist investors can compromise the independence of directors. This is because they will then have a soft corner towards the shareholders who pay them bonuses rather than being answerable to all stockholders. Well, as far as we are concerned, no human construct is perfect. This naturally means that some middle of the road solution will have to be found. It will be interesting to know what that is. As an article points out, basing a director's incentive on the company's results, not the activist investors' returns will be a good start.

With 2013 nearing an end, all eyes are set on what 2014 holds for us. Especially, on the economic front. The US Fed that has had the maximum influence on global markets this year. Speculations on whether and how soon will the Fed start tapering its QE policies affected equity and currency markets alike. At the same time global economists are divided in their opinion about the Fed's fixation with unemployment rates. Something that the easy money policy has hardly succeeded in curbing. However, as per Reuters, 2014 is unlikely to be very different in terms of the Fed's policies on QE and unemployment. For the new chief Janet Yellen, has strongly supported Bernanke's easy money policies. Also economists believe that Yellen is unlikely to do anything different from her predecessor in the short term. So while one can expect challenges galore on the economic front in the new year as well, the Fed may be the last entity to offer any surprises.

As the world economy is bracing through slowing growth, rising unemployment and several other economic maladies, excessive CEO compensation has come under the radar. In India too, market regulator SEBI is planning to make majority approval of minority shareholders mandatory for the remuneration of promoter directors. We had recently mentioned that there was a proposal in Switzerland to limit executive pay. It is worth noting at least 5 of the 20 highest paid CEOs are from Switzerland.

Should there be a limit to CEO compensation? Should the limit be decided by the government? As per Economic Times, Swiss voters have rejected the proposal to limit executive pays to 12 times that of junior employees. In other words, people do not want state prescribed limits on CEO compensation. Many believe that such a move would adversely impact the country's competitiveness and in turn hurt the economy.

This could probably be construed as a major indicator of a slowdown in the country besides the obvious growth numbers. This indicator is the vacancy rates in commercial real estate. As per a real estate broker Cushman and Wakefield, the vacancy rates in India have sky rocketed in recent times. In the major cities of Delhi and Mumbai, the rates are as high as 20%. This is the highest in the Asian region after Chengdu in China.

In the boom period commercial real estate had become a favourite for nearly every real estate investor. As a result, developers kept adding new properties in the space. And it all made sense as India was booming and a hot destination for business. Several new businesses were opening shop and the office space was being absorbed by them. But since then a lot has changed. The economy has slowed down. Foreign businesses have adopted a cautious stance because of policy uncertainty. The domestic businesses are bearing the brunt of the slowdown and are holding back on investments. As a result, there are no takers for the commercial space. Unless the economy revives and the investment cycle starts again, things are unlikely to improve. And the developers in this space will have to take the hit.

Indian stocks were not in favour with key indices trading in the red throughout the day. At the time of writing, the BSE-Sensex was down by about 120 points or 0.6%. Barring stocks from the capital goods and power sectors, weakness was seen across sectors. Banking and realty stocks led the pack of losers. Midcap and smallcap stocks were not in demand as well with their respective indices down by 0.2% and 0.3% respectively. Stock markets in other parts of Asia ended the day on a weak note with China, Hong Kong and Japan down by about 0.1% and 0.01% and 0.7% respectively.

04:50  Today's investing mantra
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." - Warren Buffett
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7 Responses to "Why US is a real threat to India's food bill?"

Mohammad umar kadiawala

Nov 28, 2013

since concress passed food bill all oppsition political and corpoeate worldalongwirh concern peoplz tying to blame on congress that cad will be affected i would like to say that is rti wrong?
Overall all benefit goes to indian poor and lower middle class citizens doesnt matter they r concwrn with congress. Bjp or any party in bjp time cargil war done just to divert people from other key issues billions of rs been wasted for that fake war as recent news clarifiess that vajpayee not rely on indian army report and depend onlly on inteligence that proved wrong secondly eighter bjp cong or any alliance so many scam been done by politician the right step to be done not to withdraw suchpeople walfare scemeb but to trim access spending of mlas. Mps and minnisters in india so many sources available to fulfilll indian poor people so many gov fund been eaten by political parties and ministeres. Why u dont blame to corporate people also as they r getting millions perks of shareholders money why dont u blame subrato roys malys and birlas as they involve in big scam where gov and public interest involved there r so many companys become default and so many psu banks are in trouble for me wharever public walfare sceme which announce and executed by any gov should be supported cause any gov is responsible to trace new sources to make up those spending over all if bassic standered of poor and lower middlle class people will improve as they r having significant part of indian communiity most probably in villages and slall towns the lliving standard as well hewill be reducedalth educatii do hoope that gas subsidy which directly goingon standard will be fine and gov other spending like public heajth will be reduced i do hope thi think at gas subsidy which directly going in public account also a good step


Ramesh Jaradhara

Nov 27, 2013

In my opinion the Food Security Bill is conceptually a wrong proposition. For how long India will keep people alive on subsidies food? If the fundamental problems in agriculture sector remains critical for long, the food subsidy can't solve the problem of poverty. The amount to be spend on food bill if invested in revamping and overhauling the agriculture sector by scientific way, the need for Govt. subsidy will be decreased substantially if not eliminated at all. India needs an indigenous policy away from imitation of the west or dictates of WTO like organizations focusing on developing the agricultural sector as the prime policy decision along with other sectors of economy. As a policy decision the corporate sector could be involved in developing agriculture sector. Agriculture sector must get the attention of policy makers, corporates and investors to achieved the desired result which eventually make the economy more vibrant and developed.


sambhu charan sannyasi

Nov 27, 2013

GOVTs of USA and EU are affraid of losing grain market or the price benefits they might be enjoying nowadays. This new bill ie FOOD SECURITY BILL of GOVT OF INDIA is calling for feeding almost 60% of our population free of cost or against a small price. For this a huge quantity of food grains will be released and we apprehend a big ammount of those grains will find way to free market though corrupt route and some may go for export. Can our GOVT prevent this apprehensive corruption?



Nov 27, 2013

Yes, You are right. Food bill will create crises for food as well as increases burden on Government.Farmer also not get good rate for their farming.Finance cirses also disturb the India's growth. This is only congress's election game. This should immediately stop OR band.



Nov 26, 2013

For collecting one/two rupee p.kg, we have to spend more then double the amount. Instead of that just take thumb impression and give at free of cost. In any case instead of
free food it is better to give some kind of work and give food fir the same. This will help to everyone and our nation.



Nov 26, 2013

As noted below No no way this food bill is good for India:Introduced in hurry to get vote in nearing election. Not well planned. no storage fscilities, no long thinking, no fund provision, no resources and we can give many more reasons. Finally this will manufacture lazy people Suggestions:Give some kind of work to all give them food
for the same. This will surely help to develop our nation.

Like (1)


Nov 26, 2013

The subsidy benefit must reach to poor people and according to the data they are nearly half of the population. It is a good concept which will have positive social economic impact. However, the Govt. must do a proper calculation of how much it will hamper the current account deficit and how long the economy can sustain this subsidy. Already Govt is providing subsidies to the Farmers. The Govt will not change its stand against US/Western pressure specially when elections are near. The future of this subsidy will depend on the era post election.

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