Vivek Kaul
Human beings love a good story. And a good story is complete. If something has happened then there is needs to be a ready explanation available for it. Nassim Nicholas Taleb writes about this in Fooled by Randomness. Taleb recounts watching Bloomberg TV, sometime in December 2003 around the time Saddam Hussein was captured in Iraq.
At this point, American government bond prices (commonly referred to as treasury bills) had gone up, and the caption on television explained that this was “due to the capture of Saddam Hussein”. Some thirty minutes later, the price of the American treasury bills went down, and the television caption still said that this was “due to the capture of Saddam Hussein”.
The question is how could the capture of Saddam Hussein lead to have two exactly opposite things? That is simply not possible. But there is a broader point here. If something happens, the human mind needs a reason, an explanation or a cause for it. Without it, the loop is not complete. Hence, the human mind actively seeks causes for events that have happened, whether those causes are the real reasons for the event happening is another issue all together.
As Ed Smith former English cricketer wrote in a recent column “The point, of course, is that causes are being manipulated to fit outcomes. They weren’t causes at all, merely things that happened before the defeat. The ancient Romans had an ironic phrase for this terrible logic – post hoc, ergo proper hoc, “after this, therefore because of this”.”
An excellent example of this phenomenon in an Indian context is the defeat of the Bhartiya Janata Party (BJP) led National Democratic Alliance (NDA) in the 2004 Lok Sabha election. Of the explanations that followed the one that gained most credibility and is still holding on strong, is the India Shining Campaign.
Since the results of the 2004 Lok Sabha elections came in, it has been widely held that BJP lost the elections because of the “insensitive” urban centric India Shining advertising campaign, which ignored the aam aadmi. The irony is that even the BJP came to believe this.
As Arati R Jerath points out in a recent column in The Times of India “Significantly, L K Advani was to acknowledge later that the India Shining slogan was “inappropriate” for an election campaign. In hindsight, many in the BJP realized that the tone and tenor were arrogant and insensitive and that it glossed over prevailing social and economic inequities that the NDA government had failed to address.”
This logic doesn’t hold true against some basic number crunching. The difference in vote share between the Congress led UPA and the BJP led NDA was a little over 2%. The NDA got 33.3% of the vote whereas the UPA won 35.4% of the vote. As economist Vivek Dehejia, the co-auhtor of Indianomix – Making Sense of Modern India, said in an interview to Firstpost “That 2% difference in vote share can equally be attributed to a number of other explanations, such as bad luck, as it is to anything else. Or let me put in another way; if you look at those results, basically it came down to a coin toss. A third of the voters voted for the NDA, another third voted for the UPA and a third voted for somebody else.”
Hence, if the NDA had got 1% more vote and UPA had got 1% less vote, the situation would have been totally different. And maybe in that situation, people would have been talking about how the India Shining campaign really worked. Given this, it is not always possible to figure out why something happened. The broader point is that India is too diverse with too many issues at play to attribute the win or a loss in Lok Sabha elections to one cause, which in this case happened to be the India Shining campaign.
But such has been the strength of this explanation that it continues to prevail. In fact, the Congress party has gone at length to explain why there recently launched Bharat Nirman campaign is totally different from the India Shining campaign of 2004. “India Shining was hype, hoopla and spin. Our campaign is different. Bharat Nirman is not a poll campaign, it tells the India story of the past nine years,” the information and broadcasting minister Manish Tewari was recently quoted as saying.
In fact, the India Shining campaign had put too much emphasis on India, people came to believe, and missed out on Bharat. So the Congress has taken great care that the Bharat Nirman campaign caters to Bharat.
That difference notwithstanding prima facie there doesn’t seem to be much difference between India Shining and Bharat Nirman. Both are campaigns launched to highlight the achievements of the incumbent government. India Shining was launched well before the Lok Sabha elections and at that point of time, the BJP leaders maintained that the campaign was meant to attract international investment and beyond that nothing more should be read into it. The Congress seems to be doing the same. As Tewari said “Elections will be held on time. There is no need for speculation.”
Eventually, the BJP got caught into its marketing blitzkrieg and advanced elections by six months. The extent to which Congress wallahs have gone to deny the link between Bharat Nirman and the Lok Sabha elections being advanced, leads this writer to believe that most likely elections will be advanced. As the line from the great British political satire Yes Minister goes “The first rule of politics: Never believe anything until it’s been official denied”. The Congress, like BJP, is in the danger of getting caught in its own spin.
India Shining cost the taxpayer around Rs 150 crore. Bharat Nirman has already spent around Rs 200 crore of the taxpayer money. As an article in the Brand Equity supplement of The Economic Times points out “Sources close to the campaign say that close to Rs 200 crore has been spent on this campaign under various heads. So large is the campaign that in recent months the government has been the single largest consumer of air time and media space on many of the major channels in volume terms.”
What hurts is the fact that the revenue stream of the government at this point of time is stretched. The Ministry of Finance has even gone to the extent of running an amnesty scheme for service tax defaulters. A defaulter can declare and pay his taxes and thereby avoid any fines or even other penal proceedings. If finances are so stretched, why is money being wasted on an advertisement campaign like Bharat Nirman?
More than anything else this government has lost so much credibility that any advertisement campaign cannot help. As Jerath puts it “The campaign is a pathetic attempt to sweep the controversies of the past three years under the carpet. A slick film and a lyrical jingle cannot erase the stench from various corruption scandals or make up for non-performance as food prices rise and the economy slows down.”
The lesson drawn from India Shining should have been that feel good advertisement campaigns run by the government and paid for by the taxpayer, do not really matter in an electoral democracy as diverse as India. Instead the government, which is seen tom-tomming its own achievement, comes across as arrogant. But the parties in power love it. As the Brand Equity points out “The temptation has been too great and a campaign of similar proportions has been released. Perhaps the only difference is that ‘India’ has been replaced by ‘Bharat’ and ‘Shining’ by ‘Nirman’. While the Congress insists that this is not a political campaign (just as the BJP insisted with India Shining), the timing and the quantum of spends seem to belie that.”
The only person Bharat Nirman benefits is the information and broadcasting minister Manish Tewari (and the media houses which get paid for carrying these advertisements), who after taking over as the I&B Minister had to show that he was doing new things that could revitalise the image of the Congress party and he has done precisely that. But this benefit might be short lived because in the days to come if the Congress led UPA loses the next Lok Sabha elections (as it is likely to), then Bharat Nirman will be held responsible for it, like India Shining was.
And then Manish Tewari, might become the new Pramod Mahajan, the man behind the India Shining Campaign.
To conclude, what happens to the taxpayer who finances these expensive campaigns? Well all he can do is sing the old Mukesh song (sung in the style of KL Saigal) “dil jalta hai to jalne de. aansoo na baha, fariyad na kar”.
The article originally appeared on www.firstpost.com on May 20, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: May 2013
Indian politics and its Lalu Prasad Yadav syndrome
Vivek Kaul
During his heydays in the 1990s and the early 2000s, Lalu Prasad Yadav never organised political rallies.
He organised Railas.
These were very big political rallies held at the Gandhi maidan in Patna. And they were deemed to be so big by Lalu that the feminine sounding word ‘rally’ proved inadequate to describe them.
Hence a new word Raila was coined.
But time passed and the world went around, and in the end the old adage ‘you can’t fool all the people all the time’, came true in case of Lalu as well.
These days Lalu is a minor player both at the state and the central level. Given this, every few months you can hear him saying nice things about Sonia Gandhi, whenever the opposition parties choose to attack her.
A couple of days earlier Lalu went back to his favourite method of political engagement. He organised a parivartan (change) rally in Patna (and not a Raila). News reports suggest that Lalu hired thirteen trains to ferry his supporters to Patna for the rally.
This is a huge change from the usual. In the Bihar, that this writer grew up in, a rally would mean an open invitation to the supporters of Lalu to board any train that they wanted to.
Also like any good father would, Lalu used the occasion of the parivartan rally to soft launch his sons Tej Pratap and Tejashwi into big-time politics. Tej Pratap is a BA drop out and Tejashwi was a budding cricketer who played one Ranji trophy match for Jharkhand in November 2009. He was also a part of the Delhi Daredevils IPL team, warming his bum on the bench for a few seasons.
It is interesting if we compare this launch with that of Lalu’s own launch into serious politics which happened in the early 1970s. Lalu had quit student politics in 1970, after he lost the election for the post of the President of the Patna University Students Union (PUSU) to a Congress candidate. Before losing this election, Lalu had been a general secretary of the PUSU for three years.
As Sankarshan Thakur writes in Subaltern Sahib: Bihar and the Making of Lalu Yadav, “On the eve of elections of Patna University Students Union (PUSU) in 1973 non-Congress student bodies had again come together, if only for their limited purpose of ousting the Congress. But they needed a credible and energetic backward candidate to head the union. Lalu Yadav was sent for.”
The trouble of course was that Lalu was no longer a student. He was an employee of the Patna Veterinary College by then. But then those were the seventies and the state was Bihar, so not being a student was a small problem that could be fixed.
As Thakur writes “Assured that the caste arithmetic was loaded against the Congress union, Lalu readily agreed to contest. He quietly buried his job at the Patna Veterinary College and got a backdated admission into the Patna Law College. He stood for elections and won. The non-Congress coalition in fact swept the polls.”
And this set up Lalu for the big league as the agitation launched by Jai Prakash Narayan, against Indira Gandhi, gathered speed. The next year i.e. 1974, the agitation against Indira Gandhi spread throughout the country. As Thakur writes, “An agitation committee was formed, the Bihar Chatra Sangharsh Samiti to co-ordinate the activities of various unions and Lalu Yadav as president of PUSU was chosen its chief.” These events catapulted Lalu Yadav into the big league from which he never looked back. He became a member of the Lok Sabha in 1977 at a very young age of 29. He became the Chief Minister of Bihar in 1990.
But the fact of the matter remains that he if he wasn’t asked to contest the 1973 PUSU elections, Lalu might have never returned to politics and probably retired by now from the Patna Veterinary College.
Lalu was lucky because he was at the right place at the right time. His sons are lucky because they are his sons. The next generation of politicians(even those who are not a part of electoral politics) is always luckier to that extent. They already have a base that has been built to work from.
But the question does the next generation respect this base because of which they get lucky? And they answer seems to be no, as a spate of recent examples show. Robert Vadra, with his land dealings in Haryana and Rajasthan, has been a huge embarrassment for Sonia Gandhi, her son Rahul and the Congress Party.
Sharad Pawar had to recently come to the rescue of his nephew Ajit, after he made insensitive comments in drought hit Maharashtra. Mamata Banerjee’s IIPM educated nephew Abhishek stands accused of running Ponzi schemes in West Bengal. News reports suggest that UP Chief Minister Akhilesh Yadav has been spending a lot of time trying to settle ‘who gets the government contract’ dispute between his step brother Prateek and his first cousins. Pawan Bansal, had to recently quit as the Union Railway Minister after the Central Bureau of Investigation (CBI) caught his nephew Vijay Singla for running a jobs for bribes racket in the Indian Railways.
And there are examples from the past as well. Atal Bihari Vajpayee’s spotless reputation as the Prime Minister of the country was marred by the dealings of his foster son-in-law Ranjan Bhattacharya. J Jayalalithaa’s weakness for her foster son V Sudhakaran tarred her reputation. The late Pramod Mahajan’s son Rahul was and continues to be an embarrassment.
The late Prime Minister PV Narsimha Rao’s son Prabhakar was accused of being involved in the urea scam in the 1990s. If we go back a little further, Moraji Desai, the fourth prime minister of India, had to deal with allegations of graft against his son Kanti Desai. Kanti Desai had allegedly collected Rs 80 lakh for party funds misusing his position as the PM’s son. Raj Narain a minister in Desai’s cabinet, even came up with the slogan “Hamse kya parda hai, Kantike haath mein garda hai (Why hide it from us, Kanti’s hands are muddied).”
Jagjivan Ram could have become the first dalit Prime Minister of independent India if he hadn’t been embarrassed by his son, Suresh Ram. Nude pictures of Suresh were published in a magazine called Surya, which was edited by Maneka Gandhi. The pictures showed him in a compromising position with a 21 year old student of Satyawati College, Delhi University, called Sushma Chaudhury, who he eventually married (On a slightly different note Suresh’s sister Meira Kumar is the speaker of the current Lok Sabha). “If the Kamasutra has 64 poses of making love, this one certainly had 10,” wrote Khuswant Singh in a later column, with regard to these pictures.
As veteran journalist and editor Inder Malhotra has been quoted as saying “In fact, in many ways Suresh Ram tried to emulate Sanjay Gandhi and received the same shelter from his father which Sanjay got from her mother. It was a game of one-upmanship.”
And Sanjay Gandhi, among all the sons, daughters and relatives of politicians, was the biggest embarrassment of them all. His dictatorial ways ensured that the Congress party was thrown out of power for the first time since independence in 1977 (For a detailed study on this Vinod Mehta’s The Sanjay Story is an excellent read). Indira Gandhi who was known to be very stern otherwise continued to be a mother when it came to Sanjay.
The broader point is that the politicians’ weakness and love for their progeny (or even other close relatives) puts them in embarrassing situations. At times, the progeny are acting as fronts for the shenanigans that the politicians indulge in and at times they are on their own. But in either condition there is a cost that is to be paid for.
A major reason that Lalu Prasad Yadav finally lost in Bihar was because of the shenanigans that his saalas (brothers in law) Sadhu Yadav and Subhash Yadav, indulged in. They had the political patronage of Rabri Devi, who was the Chief Minister of Bihar. News reports coming out now suggest that Lalu’s two sons are also not the best of buddies. And this can’t be good news for Lalu Yadav whose political fortunes have taken a huge beating since 2005.
All the politicians who promote their progeny in politics and allied areas, need to thank Indira Gandhi. If it wasn’t for her, politics in India would have never become a family owned business. As historian Ramachandra Guha said in a lecture titled Verdicts on Nehru: The Rise and Fall of a Reputation (Second V. K. R. V. Rao Memorial Lecture, Institute of Social and Economic Change, Bangalore, 20 January 2005) “After Nehru the Congress chose Lal Bahadur Shastri to become Prime Minister, a post on which he quickly stamped his authority. Mrs (Indira) Gandhi herself may never have become Prime Minister had not Shastri died unexpectedly. She was chosen by the Congress bosses as a compromise candidate who (they thought) would do their bidding. But once in office Mrs Gandhi converted the Indian National Congress into a family business. She first brought in her son Sanjay and, after his death, his brother Rajiv. In each case, it was made clear that the son would succeed Mrs Gandhi as head of Congress and head of Government. Thus, the ‘Nehru-Gandhi dynasty’ should properly be known as the ‘(Indira) Gandhi’ dynasty.”
India is still paying the costs of this monstrous mistake as almost all politicians now want to pass on the baton to their progeny and other relatives close to them. Professor Pulin Garg of Indian Institute of Management Ahmedabad used to say with regard to family owned businesses in India “Haweli ki umar saath saal ( a family owned business lasts for 60 years).” It will be interesting to see how long political hawelis last on an average? That will be a big determinant of which way India goes in the decades to come.
The article originally appeared on www.firstpost.com on May 17,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Food Security Act is another opportunity for Rahul to say I don't want to be PM
Vivek Kaul
The Congress led United Progressive Alliance (UPA) government is in a hurry to somehow introduce the right to food security during the course of this year. Media reports suggest that a special session of the Parliament may be convened to get the bill passed.
But there are several major questions that the Congress led UPA government hasn’t answered with regard to the right to food security. This has writer has discussed some of these questions in the past. (You can read them here, here, here and here).
Here are some more important questions that need to be answered before the right to food security can move from being just a Bill to an Act.
1. The current plan is to sell subsidised wheat and rice to nearly two thirds of India’s population through the public distribution system. This system comprises of around 5 lakh fair price shops. Estimates suggest that nearly 60% of the food that is supposed to be distributed through this system is either siphoned off or is simply wasted. Given that, the eventual plan is to move the right to food security to a cash transfer system.
In this those entitled to food subsidy will have to buy rice and wheat directly from the market, at the market price, and the subsidy will be directly paid into their bank accounts or will be given to them through business correspondents hired by banks.
So what happens to the public distribution system in this case? Will it be dismantled? And if that is done, imagine the kind of unemployment it will lead to. Are political parties (even those within the UPA) which are so opposed to foreign direct investment in retail, thinking about this? And these shops are largely located in rural areas.
2. If right to food security eventually does move to a cash transfer kind of system, where the subsidy is direct paid out to those entitled to it, what happens to the elaborate procurement system for rice and wheat that the government has put in place? Currently the government declares a minimum support price for wheat and rice. At this price the Food Corporation of India (FCI) and other state government agencies, operating on behalf of the government, buy wheat and rice from the farmer., which then stocked and distributed through the public distribution system. This system is expected to continue for implementing the right to food security as well.
But what happens once the right to food security moves onto the system of cash transfers? Those entitled to the right to food security will have to buy wheat and rice directly from the open market. And that being the case the government need not maintain the humongous stocks of food grains that it currently does. The government will have to just buy as much of rice and wheat as might be needed to maintain a buffer stock, which currently amounts to somewhere between 14 million tonnes to 22 million tonnes of rice and wheat.
In 2006-2007, 169.1 million tonnes of rice and wheat was produced in the country. Of this, 43.8 million tonnes or around 26% was procured by the government. In 2011-2012, 198.2 million tonnes of rice and wheat was produced. Of this 88.5 million tonnes or nearly 45% was procured by the government.
So procurement rice and wheat by the government directly from the farmers has gone up tremendously over the last few years. And this has happened primarily because of the fact that the minimum support price has been increased consistently over the years. Farmers have been encouraged to sell to the government. If right to food security moves onto a cash transfer based system, what happens to the farmers who have become now used to selling at a fixed price to the government,which they know off well in advance? How fair is it on them? Are these things even being thought about?
While the current system of procuring more and more rice and wheat directly from the farmer has led to severe distortions, but doing away with it suddenly, will have its own severe repercussions.
3. What happens in a drought like situation? In a situation where the production of rice and wheat will come down, how will the government procure the amount that will be needed to be distributed to those entitled to the right to food security? The easy answer is that rice and wheat will be imported. But as this writer has pointed out in the past “Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets imply that changes in production or consumption in major rice-trading countries have an amplified effect on world prices.” (Source: National Food Security Bill Challenges and Options, Ashok Gulati, Jyoti Gujral, T.Nandakumar, Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture)
What is interesting is that there is a Force Majeure clause in the Right to Food Security Bill using which the government can shirk any responsibility to provide rice and wheat at a subsidised rate.
The Bill provides for a Force Majeure clause (Clause 52) that “the Central Government, or the State Governments, shall not be liable for any claim by persons belonging to the priority households or general households or other groups entitled under this Act for loss/damage/compensation, arising out of failure of supply of foodgrains or meals when such failure of supply is due to conditions such as, war, flood, drought, fire, cyclone, earthquake or any act of God.”
But it is precisely at this point of time that the right to food security, if there has to be one, should be working. As CACP report points out “It is worthwhile to note that precisely in these conditions a failure of market forces, volatility in prices and resultant distress is expected and at times like this the poor and vulnerable would depend on government to ensure their food security.”
4. Also, what is the basic goal of selling rice and wheat at subsidised prices. Who is it supposed to help? As a recent article in the Mint points out “Apart from the extremely poor, who form a small fraction of the population, nearly everyone else can afford the rice and wheat they require, as Bouis points out. A February report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10. Interestingly, the average cereal consumption of families who reported that they went hungry in some months of the year (in the month preceding the survey) was roughly equal to the average cereal consumption of those who reported receiving adequate meals throughout the year.”
So the point is that government’s own data clearly points out that the number of those who cannot even afford to buy rice and wheat for their daily meals is less than 1% of the total population. Doesn’t it make sense to target this section properly than doling out subsidised rice and wheat to all and sundry? But then targeting just them really won’t help the Congress party led UPA to get the votes in the 2014 Lok Sabha election. And if that does not happen how will Rahul Gandhi, get another opportunity to say, I do not want to be Prime Minister?
5. One of the goals of the right to food security is to improve nutrition. How does selling rice and wheat at a subsidised price help improve nutrition? The NSSO data quoted above clearly shows that most Indians can afford the rice and wheat they need to buy. To improve nutrition more consumption of vitamins and minerals is required. Howarth Bouis , director of HarvestPlus, International Food Policy Research Institute (IFPRI), made a very interesting point in an interview to the Mint a few months back. “ Food prices have been going up over time but we have to make a careful distinction in the Indian case between cereal and milk prices on the one hand, and all other foods on the other hand. After the green revolution, yields of rice and wheat shot up, and prices actually came down. Maybe prices have risen in the past couple of years but over the past 40 years, prices have fallen. The story is similar for milk. But if you look at all the other food groups such as fruits, vegetables, lentils, and animal products other than milk, you will find a steady increase in prices over the past 40 years. So it has become more difficult for the poor to afford food that is dense in minerals and vitamins.”
This explains the real reason behind poor nutrition in India. And no amount of selling of rice and wheat at subsidised prices can cure that. If nutrition needs to be improved food inflation which has gone through the roof needs to be controlled.
There are other factors as well. As the CACP report points out “studies have shown that the challenge of improving absorption lies in linking nutrition with health, education and agriculture interventions. Access to sanitation facilities and women’s literacy in particular are found to be strong factors affecting malnutrition.”
These are some more questions regarding the right to food security which need to be answered. In its current form the Right to Food Security Bill is nothing but a vote gathering ploy for Rahul Gandhi and nothing else, the bleeding hearts of jholawalas notwithstanding.
The article originally appeared on www.firstpost.com on May 16, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
If gold is a bad investment, so are stocks
Vivek Kaul
Gold is a bad investment.
This is something that is being often heard lately. The naysayers have all come out of the closet after the recent fall in price of the yellow metal. While it was rallying, they didn’t have a word to say.
One of the main reasons offered in favour of gold being a bad investment is that if we take official inflation into account, the yellow metal has still not crossed the price of $850 an ounce (one troy ounce equals 31.1 grams) that it reached in 1980.
As Nick Barisheff, President and CEO of Bullion Management Group writes in his new book $10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Heaven “It seems that everyone has a story about someone they know who bought gold at $850 per ounce in 1980 and had to wait twenty eight years to break even. If we take “official” inflation into account, the gold price would need to reach $2,200 for that to happen.”
So in other words the individual who bought gold when it touched a peak price of $850 per ounce is still to make money. Seems like a fair point.
Now lets try and dissect this argument a little. Gold reached $850 per ounce on January 21, 1980, a then all time high. A day earlier it had closed at a price of $835 per ounce. And a day later it fell to a price of $737.5 per ounce.
As the above table shows, the price of gold remained above $800 per ounce only for two days. In 1980, the average price of gold was $612.5 per ounce. In 1979, the average price of gold was $306.9 per ounce. In 1978, it was much lower at $193 per ounce.
So the point is only those people who bought gold around its very short term peak price of $850 per ounce, would have lost money. And that cannot be an effective argument against buying gold. In fact, that may happen to almost anything that is bought at its peak price.
“If you buy an investment a cyclical peak, you will have to wait a long time to break even. The Dow Jones Industrial Average (which is America’s best known stock market index) did not surpass its 1929 peak until 1953 (twenty four years later). It did not surpass its 1968 peak until 1982 (fourteen years later),” writes Barisheff.
Or lets take the case of the Japanese stock market index, Nikkei 225. On May 15, 2013, it closed at 15,096 points, and this when it has rallied by nearly 67.7% from mid November 2012. But it is still down 61.3% rom an intra-day high of 38,957 points that it achieved on December 29,1989. So anyone who had invested in the Japanese stock market at its peak in December 1989, and held onto his investment, would still be losing money.
And then there is also the case of Nasdaq Composite, an American stock market index, which is a favourite with technology companies. On May 14, 2013, this index closed at 3462.61 points. It is still down by nearly 32.5% from an all time high of 5132.32 points achieved on March 10, 2000. “This even after a number of its stocks, which had become completely worthless were replaced,” writes Barisheff.
Lest I be accused of giving examples of only foreign stock market indices, lets look at something closer to home. The BSE Sensex touched a then all time high of 4630.54 points on September 12,1994. This level was crossed nearly five years later in July 1999, when the dotcom boom was at its peak. In fact those who had invested in the Indian stock market at its 1994 peak would have started to make some real money only by 2005, after more than ten years of holding onto their investment.
More recently, anyone who had invested in Indian stocks in December 2007, when the Sensex reached its then peak of 20,287 points, would still be losing money five years later. On May 15, 2013, the Sensex closed at 20,212.96 points.
So much for stocks being a long term investment. And there is more to consider. As Barisheff points out “One cannot compare gold held in a vault to an investment in stocks. Stocks cannot be compared to gold when it comes to risk. Virtually all of the stocks that existed in 1700 no longer exist today, so at some point investors and their descendants would have lost their entire investment.”
What also happens is that indices keep replacing stocks which are not doing well or have become completely worthless (as happened in the case of Nasdaq Composite). As Barisheff points out “Of the thirty stocks that made up the Dow (in reference to the Dow Jones Industrial Average) in 1929, only General Electric and Exxon Mobil (formerly Standard Oil) still form a part of the Dow today. Of the thirty stocks that made up Dow in 2000, only twenty-three are still Dow components today. If investors buy stock and that stock declines to zero, they lose their investment. They cannot simply replace it with another stock and ignore the loss (which is what indices do).”
Another regular criticism against gold is that it does not pay any dividends or interest. This was the explanation given by the Bank of England in 1998, when it sold half of its gold reserves. “The British sold 395 tonnes of gold at an average price of $275.6 per ounce, and then the price of gold rose nearly 700 percent… Britain sold its gold for a total of $3.5 billion. At $1,900.3 an ounce, gold’s highest price of the last decade, this gold would be worth about $24 billion,” writes Barisheff.
Of course $24 billion would have more than taken care of any interest income that the Bank of England would have earned by investing the $3.5 billion that it got by selling gold. Also the gold lying in the vault is not being put at any risk. As Barisheff puts it “Again, gold, like currency or any other asset that sits in a vault, will not earn interest or dividends. However, it is also not at risk. No asset class generates income unless give up possession of your capital and take the risk of not getting it back. The term “investing” implies risking for the sake of potential profits.”
This is something worth thinking about, the next time you hear a so called expert saying, gold is a bad investment.
The article originally appeared on www.firstpost.com on May 16, 2013
(Vive
k Kaul is a writer. He tweets @kaul_vivek)
CAG report shows why food security will be a disaster
Vivek Kaul
On May 7, earlier this month, the Comptroller and Auditor General (CAG) of India presented to the Parliament a Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India.
This report has gone largely unreported in the media, given that it does not contain any big number running into lakhs of crore like a few previous reports of the CAG did. But it clearly explains why the government of India is in no position to introduce the right to food security. And if it does that, it will be a disaster.
Currently the government declares a minimum support price(MSP) for wheat and rice paddy, and buys them directly from the farmers using the services of the Food Corporation of India(FCI) as well as state government agencies. FCI and other agencies are expected to buy all the rice and wheat that lands up at the government mandis.
The data put out by CAG clearly shows that the procurement of wheat and rice by the government has gone up dramatically since 2006-2007 (i.e. the period between April 1, 2006 and March 31, 2007). In 2006-2007, 75.8 million tonnes of wheat was produced by the Indian farmers. Of this nearly 18% landed up with FCI and the state government agencies. In 2011-2012 (i.e. the period between April 1, 2011, and March 31, 2012), the wheat produce had shot up 93.9 million tonnes. Of this nearly 35% landed up with the FCI and state government agencies.
When it comes to rice the situation is even more pronounced. In 2006-2007, the total rice production was at 93.4 million tonnes. Of this 32% landed up with FCI and other state government agencies. In 2011-2012, the rice produce was at 104.3 million tonnes. Of this a whopping 54% landed up with FCI and other state government agencies.
What this tells us is that more and more rice and wheat is landing up with the government. This is primarily on account of the fact that minimum support price has consistently been raised over the last few years, encouraging the farmers to sell directly to the government.
And this has done in a totally random manner. As the report points out “ No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Typically MSP needs to be fixed depending on the rates recommended by Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture. While determining the MSP, CACP takes into account, the cost of production, domestic and international market prices, stock position, prices fixed in previous years etc. So even though there is a robust method for determining the MSP at which the government of India should buy rice and wheat from farmers, that is not being followed.
Also as more and more rice and wheat lands up with the government, there is less of it available in the open market. In 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
And that explains the high cereal inflation of 16.65% in April, 2013. If food security becomes a right, the government will need to buy more rice and wheat than it currently is, and that will mean lesser amount of rice and wheat available in the open market as has been the case over the last few years. This will push up their price further.
The conspiracy theory here is that if food security bill is passed (or even brought in through an ordinance) a lot more rice and wheat will land up in the open market and thus slowdown cereal inflation. The government plans to use its rotten public distribution system to distribute rice and wheat, and that means that a lot of it will be sold in black and end up in the open market. This is expected to drive down the price of rice and wheat. And this for all we know this might very well turn out to be true.
Once FCI and other state government agencies have procured the wheat and rice it needs to be stored. The CAG has also audited the total storage capacity of FCI (its own as well as hired) over the years.
As on March 31, 2007, the total storage capacity of FCI stood at 25.2 million tonnes. The total stock of food grains(i.e. both rice and wheat) stored in the central pool as on June 1, 2007, stood at 25.9 million tonnes. So storage capacity more or less matched the total amount of food grains stock. The total stock of food grains that is held by the FCI, state governments and their agencies, is referred to as the central pool.
But the situation has changed dramatically since then. As on June 1, 2012 (on June 1, the central pool stock is at its peak) the total amount of food grains in the central pool stood at 82.4 million tonnes. Some of this grain was distributed to the states which do not produce enough rice and wheat of their own. After this the total amount of food grains stock stood at 66.8 million tonnes.
In comparison the storage capacity was at 33.6 million tonnes. This meant that there was a gap of 33.2 million tonnes. So nearly 50% of the food grains remaining in stock did not have any storage space.
As the CAG report mildly puts it “the available storage space operated by FCI was largely inadequate”. Given this lack of storage space FCI could not take over the wheat that had been procured by various state government agencies on its behalf. This also explains to a large extent why newspapers regularly print photographs of rice and wheat rotting in the open after it has been procured by the government.
So what does this mean in terms of the right to food security? As more and more rice and wheat is bought by the government, a large amount of it will rot in the open given that FCI does not have enough storage space. Of course, the FCI can build/hire new storage space. But its past record of doing the same is simply abysmal.
As the CAG report points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-2007 and 2011-2012; FCI increased its storage space through hiring or owned space only to extent of 8.4 million tonnes (18 per cent) which was not commensurate with increase in food grains stock level. It owned storage capacity increased by mere 0.4 million tonnes during the period.”
What this means is that while FCI managed to create a storage capacity of 0.4 million tonnes on its own, the total food grains in stock went up by more than 100 times to 45.8 million tonnes. Even if we take total increase in storage capacity of FCI, the increase in food grains stock was almost 5 and a half times.
So what does this tell us? The FCI has not been able to create storage capacity. And it cannot create storage capacity in a hurry in the time to come. Given that, where will all the rice and wheat that will be bought by the government to fulfil the right to food security, be stored? Why don’t the jholawalas led by Amartya Sen give us an answer for that? Imagine the humongous amount of rice and wheat that will rot throughout the country after it has been acquired by the government. What will be the social and economic implications of that?
FCI procures most of the rice and wheat in the states of Punjab and Haryana. As the CAG report points out “During the period 2006-2007 to 2011-2012, about 75 per cent of stocks were moved by ex- North as procurement was largely concentrated in the North and the remaining 25 per cent was moved from other procuring states of Andhra Pradesh, Chattisgarh, Odisha, West Bengal and Madhya Pradesh. During the six year period, movement of stocks by rail constituted about 92 per cent and the remaining 8 per cent was moved by road.”
Hence, rice and wheat is moved from states which produce more than what is required for consumption and distribution within the state, to states which do not produce enough. This movement is largely carried through Railways. Every month FCI prepares a movement plan in terms of railway rakes to be dispatched to various destinations throughout the country. The trouble is that there is a shortage of railway rakes. In 2006-2007 this shortage was 10%. In 2009-2010 it increased to 12%. And by 2011-2012 this had shot up to 17%.
This shortage of rakes needs to be addressed immediately. If, right to food security comes in, this shortage is likely to go up, given that more food grains will have to be moved across the country.
These are some of the basic issues that the CAG report on FCI points out.
The jholawalas are not bothered about this. They just want the right to food security bill to be introduced and the rest of it will sort itself out as we go along is the argument that they are making.
But anyone who has some understanding of this country and the way it works, knows that nothing will sort itself out. Things will get bad, before they get worse.
Let me conclude this piece with one my favourite Urdu couplets:
Na Khuda hi mila, na visaal-e-sanam/Na udhar kay rahay, na idhar kay rahe
(I found neither faith, nor union with my lover/And now I belong neither there nor here).
That’s the way we seem to be headed when it comes to right to food security.
The article was originally published on www.firstpost.com on May 14, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)