Food for thought

15 JANUARY 2011

The National Advisory Council, headed by Sonia Gandhi, has recommended that a minimum food allowance should be a legal entitlement; a lot of Indians are undernourished. It has recommended that a whopping 72% of India's population have a legal entitlement to wheat at Rs 2/kg and rice at Rs 3/kg, and estimates the foodgrain requirement to be 55.5m. tonnes by 2014, to achieve it. The Prime Minister's Chief Economic Advisor, C Rangarajan, a former RBI Governor, disagrees, opining that the foodgrain requirement would be over 65 m. tonnes. He asks the Government to be clear about how the legal entitlement, once granted, would be met. He is right to sound the caution.

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Several things will happen, as has been the case. One, more persons will clamour for benefits (witness the desire of the Gujjars to be termed backward, in order to get job entitlements). Two, you can be 100% sure there will be leakages, so the 55.5 m. figure, or 65 m. estimated by C R, will balloon to God only knows what. There are no funds available to meet this. Three, there would be no way for any future democratic Government to reverse the law, if it turns out, as it will, that it would pose an unmeetable liability. The Government had, similarly, announced a legal right to education but has not the ability to deliver it.

Any well intentioned scheme, such as the right to food or to education, must find ways, at the beginning, to fund itself and be self sustaining. In our system of democracy politicians load the exchequer with burdens for their own, immediate, political ends. Such a scheme would resonate well with the electorates of the states of West Bengal, Orissa, Tamil Nadu and others, which go to the polls this year. The economist side of the Prime Minister surely knows this, but the political part of him suppresses it.

He doesn't have to dig too far to see the pernicious effects of such well intentioned but unplanned moves, purely for political considerations. Promise of free power to farmers has ruined many of them - their land was inundated with water pumped for free. Similarly, the subsidy on urea is politically impossible to remove, even though, because of it, farmers are destroying their lands' productivity through overuse of it. Almost everyone accepts that subsidies on petrol (used by citizens who are well above the poverty line, if they can afford a car) and diesel (used by companies for transporting goods and companies cannot be below poverty line) need to be discontinued, but the Government is unable to do it.

India has to significantly improve its agriculture performance. For starters, terms of trade are manifestly unfair to agriculture; it gets less than 15% of national income even though 60% of population is dependent on it. Given this, farmers should be incentivised with higher prices; that is, after all, how a free market works, right? Yet, when prices go up, all sorts of bans on export or price curbs come up, essentially to save the Government from a backlash from urban voters who are more vocal. For example, the Government has placed a 2.5m. bale limit on export of cotton. Why? The ban artificially depresses prices, if we presume there is an export demand for it, and disincentivises production. It thus protects the domestic spinning industry at the cost of the farmers. Yet, if India is to achieve, and maintain, a 9% GDP growth rate, this cannot be done without an improvement in agricultural production, which can come mainly through better productivity. We also need to produce more foodgrain; as living standards rise, food intake would, as well.

Given that 60% of the population gets less than 15% of the income, most of the farmers would be subsistent. Yet agricultural income is kept tax free. This is sheer deceipt. It is not intended to benefit these subsistent farmers. The true intention is to conceal the laundering of bribes. Consider that a news item in Jan 14 Economic Times talks of a Punjab politician ordering 1200 bottles of single malt whiskies, at Rs 5000 each, for his son's wedding. If it were a private citizen splurging Rs 60 lacs on just one item of expenditure, the IT department would have swooped down on him. There are two sets of laws in India.

What an honest Prime Minister, if he were true to his job and to his honesty, would do is to remove the tax free status of agriculture income. Should he wish to be kind to farmers, he could have a tax free limit double that of non agricultural income. But by removing the tax free status he would remove a main avenue of money laundering and do India a big service.

Improving agricultural production is further complicated by wildly changing weather patterns. Flooding in Australia has submerged an area larger than France and Germany combined and caused unbelievable havoc. Floods in Sri Lanka and in Brazil have displaced millions of people. Snowstorms in Europe last month disrupted flights. Mother Nature is hitting back at the abuse heaped on her, with a vengeance. One cannot envisage how changing weather patterns could affect India's food producing areas.

In other news of interest, the Supreme Court has allowed notices to be issued against Government of India and 11 telcos, asking why the spectrum allotted, illegally and out of turn, to them, should not be forfeit. Kapil Sibal has contested the claim of the Comptroller and Auditor General that the out of turn allotment resulted in a loss of Rs 1.7 lac crores. In the computation of loss he has a point, as there is a continuing debate about whether spectrum, a scarce resource, should be priced to fetch the maximum revenue for its owner, viz. the Government, or whether it should be priced fairly, and a minimum amount distributed evenly, on the grounds that spectrum is 'commons', and thus benefit the consumers.

The Government had tried the first approach when it first sold 2G licences, with spectrum, to 2 players per circle, garnering some Rs 10,000 crores for it. As a result the cost per call was Rs 16/minute, collected from both parties, and the service was unaffordable. The telecom revolution only took off when the Government changed its policies, treating spectrum as 'commons', and switching to a revenue share.

The problems were two. One that the spectrum was allotted to a favoured few and out of turn. Two that these favoured few sold their spectrum entitlements, without setting up telecom services and denying the benefits to consumers of treating spectrum as 'commons'.

As these columns have suggested, this is easily addressable. The Government ought to sell the right of usage of spectrum and not the ownership of it. Thus if the 11 allottees sold either the spectrum, or a circle of operation, or a stake in the company, the Government would be entitled to step in and claim its share of the profits of such alienation of rights.

The only flaw in such an arrangement is that it benefits the country and not the policy makers.

In corporate news of interest, ONGC is being shafted. It had taken a 30% stake in the oilfields of Cairn India, but had to pay 100% of the royalty, presumably under pressure from the Ministry when it was signed. This burden of royalty has significantly and obviously, reduced its return on investment. It got its chance to renegotiate the arrangement when the British majority owner of Cairn sought to sell its stake to Vedanta. ONGC was initially backed by the Petroleum Ministry but is now being asked by it to honour its contractual obligation. The Petroleum Ministry has, in turn, been asked by the Prime Minister, to decide the matter by the end of January.

In an out of court settlement with SEBI two companies of the Reliance ADAG group, viz. Reliance Infra and RNRL, Anil Ambani and some top executives, have paid a Rs 50 crore fine and been asked to refrain from secondary market operations in 2011. There being no restriction on primary market raising of capital, the settlement would not perhaps be particularly painful.

In corporate results for the December (third) quarter, Infosys's increase of profits by 14.2% yoy, to Rs 1780 crores, disappointed. The market was expecting a better performance. It expected an increase in $ revenue of 7-8%; Infy declared an increase of 6. HDFC showed a 32% increase in net profit, but helped largely by sale of investment in IL&FS. SAIL's net profits were down 34% due to higher coal costs.

Results for the quarter are likely to disappoint high expectations of them and, with the US economy showing stronger resilience, the FIIs are heading home. For the first 4 days of last week, FIIs were net sellers each day; whilst domestif mutual funds were net buyers during the first 3 days.

Higher food inflation, a low IIP number of 2.7% (an 18 month low), increasing interest rates, FII withdrawal back to an improving US economy, were factors that led to the 822 point fall in the sensex, which ended the week at 18860 and of 350 points in the Nifty, which enede at 5654.

The market is likely to find support at around the 18000 level on the sensex. It is, however, unlikely to behave like the bride, and runaway.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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10 Responses to "Food for thought"


Jan 19, 2011

facing trouble for we-blocker


V S Gurumani

Jan 18, 2011

Not too long ago, when P Chidambaram was finance minister, he produced a paper outlining Merit and Non Merit subsidies. Then, there was also the promise that the latter would be pruned systematically, and the former would be maintained at the same absolute levels. As it always happens, the government forgets such promises and the media gets taken up with the current hot story and never reminds the government of them. Coming to food security, the only thing the government needs to do is to find a way to deliver value to the poor using the PDS route rather than create fresh entitlements. There is enough success in Chattisgarh, Gujarat and Tamil Nadu to replicate. But to do that, we need someone other than Sharad Pawar as the minister in charge!


Simratpal Singh

Jan 17, 2011

I am a regular reader of your column, but responding for the first time. Your articles make all the scenarios crystal clear. This isn't possible without indepth knowledge. I sometimes regret that people like you aren't in politics and the consequence is that our rich country is in hands of poorly educated people, who are exploiting its strength for their very own mean benefits. If our politicians start thinking the way you do, India would really be a better place to be in.
Thanks a ton for sharing your study with readers. Keep the good work on. GOD Bless you.



Jan 16, 2011

Soniaji is a just lady.She did not come to politics for
several years even all persuaded her to do so.She came
when she thought that she was fit to do some good for the
people of India.To get money from political power is out
of question for her.If she can get a government of
majority like Rajibji then she can delver the desired



Jan 15, 2011

You are daydreaming.This powerless PM can do nothing & will do nothing.Dont expect him to do anything.Pricerise is too much.He is not willing to bring down price though he can.Opposition is also with hoarders.People of India will suffer in silence,how long?


Om Prakash Sharma

Jan 15, 2011

Mrs Sonia Gandhi is simply trying to show that she is real friend of the Aam Aadmi. But is far from truth. She is tarnishing te image of PM(an honest person having taken upon himself all the color of coal and leaving her and son clean to take over gaddi; the congressman falsly propogating that it was sacrificed by her. As if this family is the owner of India).


Dilipkumar A Shah

Jan 15, 2011

The analysis regarding providing the food at subsidised price to poor people is very good and brings out the issues related to its implementation and the danger ahead.The problems being faced by US Government in providing social security are well known.
I enjoy your articles and read with interest.Please keep it up


Prakash Basrur

Jan 15, 2011

Such "playing to the gallery" gimmicks by Congress leaders are not at all new ! Nehru ( through Communist Mahalnobis ) had promised every Indian to have " a one-room house + a bycycle + one 60 watts light " by 1960 ! His illstrious daughter Indira announced her (in)famous "18-point programme" for the upliftment of the downtrodden in India , Indira's son Rajiv on visit to Dharavi slums in Mumbai in 1986 had promised a total remake of that shanty town and house every family there in a 2-room tenement under "Indira Awas Yojana" ! Now it is Rajiv's Italian widow is promising "food-as-legal right" to every Indian after her earlier un-fulfilled "right-to-education" promise ! In communist Russia their politbureau promised similar things to the Russians in 1913 onwards till 1995 but failed to satisfy their citizens and the Russian "Communist-Empire" collapsed ! The Chinese communists have suddenly changed their economic course since 1976 and adopted partial "Free-Market" economic model but everyone knows that the there is just an increased "wealth generation" in China today but very less "wealth distribution" tricling down to "Aam Chinese" ! In "Mera Bharat Mahaan" we have exported 1.47 trillion US dollars cash to Switzerland only which on worldwise basis may amount to 3 trillion US Dollars ! This seems to have happened during the "absolute majority" perriod of Congress between 1950 and 1980 ! How much has been added to that booty by our "Netas & Babus" between 1980 and 2010 is anybody's guess ! ( final figure of US dollars 10 trillion ? ) Is there any hope at all for "Mera Bharat" to become "Mahaan" ? Is there a Lee Kew Wan ( Singapore's benevolent dictator ) amongst us ? Or should we "Quit India" after 70 years' "freedom" ?


Constance Blackwell

Jan 15, 2011

You are clearly a clever economist - but not a politician - which is good but right now - be afraid very afraid of the consequences of the rise in food prices
- the suggestion of immediately help is correct politically and socially - it should be temporary.
Then another solution using your clever economists brain can be set out. Do not set up India as a place for massive food riots - look at what triggered Tunesia -
Be afraid very afraid all major revolutions and major social disturbances happened when there were severe weather patter disturbances -
She is smarter than you give her credit for
Constance Blackwell - Historian



Jan 15, 2011

Very interesting,informative article which not only gives the problems being face by present government but also gives solution to the policy makers. Alas,we are govern by illetarate, corrupt,inefficient,self centred,yesman beaurocrat and politician who do not want to see interest of this great nation but their own and their family. Only honest dictator and or god can help us.

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