Month: June 2015

Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around. “Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year. One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “Importing some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013),” the report points out.
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on June 11, 2015

What we can learn about Indian economic growth from the Second World War


On May 29, 2015, the ministry of statistics and programme implementation declared the gross domestic product (GDP) growth numbers for the last financial year 2014-2015, as well as the period between January and March 2015. The GDP is a measure of the size of an economy, and the GDP growth is essentially a measure of economic growth.
The GDP growth for 2014-2015 came in at 7.3%, whereas the GDP growth between January and March 2015 stood at 7.5%. The trouble is that these numbers which are theoretical constructs don’t seem believable once we start looking at real economic numbers.
Bank lending remains subdued. So do car sales. Corporate profitability is at a one decade low. And exports are stagnant. Capacity utilization continues to remain bad. And so does investment. In fact, the Reserve Bank of India governor, Raghuram Rajan even said the following, in an interaction he recently had with the media: “In the eyes of the rest of the world, it is a discrepancy why we feel the need for rate cuts when the economy is growing at 7.5%. Most economies growing at 7-7.5% are just going gang-busters and the issue there would be to restrain rather than accelerate growth.”
It seems that the Indian GDP number may have become a victim of what economists call the “survivor bias”. Before I get into explaining this bias some background information is necessary. In late January earlier this year, the ministry of statistics and programme implementation released a new method to calculate the GDP.
In the old method of calculating the GDP one of the key sources of information about the private sector was the RBI Study on company finances, which took into account financial results of around 2500 companies. The new GDP series uses the database of ministry of corporate affairs (MCA).
As Deep N Mukherjee of India Ratings recently wrote in a column on Firstpost: “The new series justifiably attempts to increase the coverage of the corporate sector and has used the MCA21 database maintained by the ministry of corporate affairs. Approximately 14 lakh companies are registered with MCA, of which 9.8 lakh companies are active. Post filtering for data availability, 5 lakh companies have been analysed and used for GDP estimation for 2011-12 and 2012-13.”
On the face of it, this sounds like a good thing to do. The trouble is that since 2013-2014, the number of companies on the database has come down to 3 lakhs.
“This is an outcome of companies not reporting possibly because they are closing down their operations. Thus, if out of 5 lakh companies 2 lakh have not reported, it should normally set alarm bells ringing about the economy. How the current methodology addresses this ‘survivor bias’ in the data is not clear,” writes Mukherjee.
And what is survivor bias? Let me recount a story from the Second World War in order to explain this. During the Second World War, the British Royal Air Force (RAF) wanted to protect its planes from the German anti-aircraft guns and fighter planes. In order to do that it wanted to attach heavy plating to its airplanes.
The trouble was that the plates that were to be attached were heavy and hence, they had to be strategically attached at points where bullets from the Germans were most likely to hit.
An analysis revealed that the bullets were hitting a certain part of the plane more than the other parts. As Jordan Ellenberg writes in How Not to Be Wrong: The Hidden Maths of Everyday Life: “The damage[of the bullets] wasn’t uniformly distributed across the aircraft. There were more bullet holes in the fuselage, not so many in the engines.”
This essentially suggested that the area around the fuselage was getting hit the most by bullets and that is the area that had to be plated. Nevertheless, the German bullets should also have been also hitting the engine because the engine “is a point of total vulnerability”.
A statistician named Abraham Wald realised that things were not as straight forward as they seemed. As Ellenberg writes: ‘The armour, said Wald, doesn’t go where bullet holes are. It goes where bullet holes aren’t: on the engines. Wald’s insight was simply to ask: where are the missing holes? The ones that would have been all over the engine casing, if the damage had been spread equally all over the plane. The missing bullet holes were on the missing planes. The reason planes were coming back with fewer hits to the engine is that planes that got hit in the engine weren’t coming back.” They simply crashed.
As Gary Smith writes in Standard Deviations: Flawed Assumptions Tortured Data and Other Ways to Lie With Statistics: “Wald…had the insight to recognize that these data suffered from survivor bias…Instead of reinforcing the locations with the most holes, they should reinforce the locations with no holes.”Wald’s recommendations were implemented and ended up saving many planes which would have otherwise gone down.
Interestingly, survivor bias is a part of lot of other data as well and leads to wrong analysis at times. Take the data for judging the performance of mutual funds over a long period of time. The numbers typically end up overstating the returns earned primarily because something’s missing. As Ellenberg writes: “The funds that aren’t. Mutual funds don’t live forever. Some flourish, some die. The ones that die are, by and large, the ones that don’t make money. So judging a decade’s worth of mutual funds by the ones that still exist at the end of ten years is like judging our pilot’s evasive manoeuvres by counting the bullet holes in the planes that come back.” Hence, it makes sense to be sceptical about any mutual fund study that shows high returns. The first question you should be asking is whether the study has taken the performance of dead funds into account or not.
Now how is this linked to the Indian GDP? It is possible that the data being used to calculate the Indian GDP is not taking into account the fact that out of the five lakh companies on the MCA database around two lakh companies have not reported their numbers and may have possibly been shutdown. And if that is the case the corporate growth numbers are possibly being overstated and in the process pushing up the overall GDP number as well.
The economists need to be able to crack this puzzle and tell us the real story.

The column originally appeared on The Daily Reckoning on June 10, 2015 

Why bosses suck

Around ten days back, I met a cousin who is doing her MBA from a premier business school in the country. She has just finished her summer training and was rather disappointed with her boss (aren’t we all?).

My cousin, of course, goes back to her MBA course and hence, does not need to deal with her now former boss, on a daily basis. But everybody is not as lucky. In fact, time and again research has shown that “people quit their bosses and not their jobs”.

And the tragedy is that most organisations do not address this issue at all. Also, if you are honest enough to highlight this fact in your exit interview, chances are you won’t get hired back by the company in the days to come, if a such situation arises at all.

So the question to ask is why do bosses suck? Many years back, Laurence J. Peter came up with the Peter’s Principle, which essentially states that every person rises to his or her level of incompetence in an organisational hierarchy. So good software coders do not always make for good project managers, once they are promoted. Good teachers do not make for good principals. Good breaking news reporters do not make for good editors. And good batsmen do not always make for a great captain.

This happens primarily because individuals get promoted up the hierarchy on the basis of how good they are at their current job. But once they have been promoted the skill-set required to handle their next job maybe totally different. And they may not have that skill-set at all. This lack of competence creates a problem for those who report to them.

What this means is that everyone is not suited for being promoted up the hierarchy. Nevertheless, people need to be promoted. As Dan Ariely, an Israeli American professor of psychology and behavioural economics, writes in his new book Irrationally Yours: “[The] feeling of progress is very important to our well-being and it provides gratification, self-esteem, and recognition from our peers.” And this feeling of progress comes when people are promoted.

One way companies have tried to tackle the “feeling of progress” is by creating more layers in the hierarchy, where an individual gets promoted, gets a new designation, perhaps more money, but is essentially doing the same thing.

As Ariely puts it: “Widespread recognition of the need for progress explains why so many companies have invented titles and intermediate positions for management types (officer executive,… vice president, senior vice president, deputy CEO, etc.)…Companies want their employees to feel that they are making progress and moving ahead even when these steps are not very meaningful…Most companies across all positions, have a list of titles that give all employees the feeling that we are moving ahead on this treadmill.”

The trouble is that this game of “inventing titles” has not done anything to solve the basic problem of individuals rising to their level of incompetence in a hierarchy. In fact, research shows that incompetent bosses know that they are “incompetent” and this makes them aggressive and a “pain in the ass” for the individuals who report to them.

As Nathanael J. Fast and Serena Chen write in a research paper titled When the Boss Feels Inadequate: “A lack of perceived personal competence may foster aggression among the powerful. We base this idea on the notion that power increases the degree to which individuals feel that they need to be competent—both in order to hold onto their power and to fulfil the demands and expectations that come with their high-power roles.”

The researchers further state that: “Power holders who perceive themselves as personally incompetent might display aggression.” And that’s why bosses continue and will continue to suck. Further, organisations not do anything about it.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on Bangalore Mirror on June 10, 2015 

Why Lalu Yadav had a change of heart towards Nitish Kumar

009_lalu_prasad_yadav

Lalu Prasad Yadav has gulped “poison” but is still alive. As he told reporters yesterday: “I want to assure the secular forces and the people of India that in this battle of Bihar, I am ready to gulp everything. I am ready to consume all types of poison. I am determined to crush the hood of this snake, this cobra of communalism.”

The p-word is essentially a metaphor for Lalu accepting that Nitish Kumar, the current chief minister of Bihar, be projected as the chief ministerial candidate in the assembly elections scheduled in the state later this year. The Rashtriya Janata Dal (RJD) leader had resisted Nitish being projected as the chief ministerial candidate until now.

But with Nitish declaring on June 7 that he no longer wanted an alliance with the RJD for the forthcoming polls, Lalu had no other option but to agree to Nitish being projected as the chief-ministerial candidate.

Mulayam Singh Yadav, the president-designate of the proposed new Janata Party, welcomed this decision of Lalu and said: “I am very happy about the unity of Lalu Prasad and Nitish Kumar. Kumar will be the chief ministerial candidate for Bihar. Laluji has proposed Nitish Kumar’s name for the chief ministership. Laluji said he will campaign.”

Lalu may want us to believe that he drank the poison to crush the cobra of communalism, but that is not really the truth. If Lalu had to continue to stay relevant in the years to come he needed to ally with Nitish. He had no other option.

The electoral numbers of the 2014 Lok Sabha polls give us the answer. Data from the election commission shows that the combine of Bhartiya Janata Party (BJP) and Ram Vilas Paswan’s Lok Janshakti Party (LJP) got 36.36 per cent (BJP = 29.86 per cent + LJP = 6.5 per cent) of the valid votes polled during the Lok Sabha elections last year.

The RJD and the Congress Party which fought the elections together got 20.46 per cent and 8.56 per cent of the valid votes respectively. Nitish’s Janata Dal(United)(JD(U)) which fought the elections separately got 16.04 per cent of the valid votes. Hence, the vote percentage of JD(U) + RJD at 36.5 per cent was slightly more than that of the BJP + LJP at 36.36 per cent. Further, RJD+JD(U)+Congress got more votes than BJP + LJP. Nevertheless, since RJD + Congress and JD(U) were not in alliance, these votes did not translate into Lok Sabha seats.

The RJD won only four seats in the state and its alliance partner the Congress party, won two seats. The JD(U) also won only two seats. The BJP on the other hand won 22 seats whereas its partner LJP won six seats.

As is obvious from the data, the LJP won six seats with 6.5 per cent of the votes polled, whereas the RJD won four seats with 20.46 per cent of the votes polled. This was simply because the LJP got its alliance right.

Obviously Lalu understands this electoral math well enough. And given this, he is ready to let Nitish be projected as the chief-ministerial candidate, his initial reluctance notwithstanding.

Interestingly, in the by-elections that happened for 10 assembly seats in August 2014, the JD(U) came together with the RJD+Congress and took on BJP+LJP. The data from the election commission shows that the RJD+Congress+JD(U) got 45.6 per cent of the total votes polled. The BJP+LJP got 37.9 per cent of the votes polled.

Given that, JD(U) was not fighting the elections separately, the votes polled translated into assembly seats as well, unlike the Lok Sabha polls. The RJD+Congress+JD(U) got six out of the ten Assembly seats. Hence, there is some evidence of the alliance working.

Lalu and Nitish have had an “edgy” relationship for the over four decades that they have known each other. Nitish became the chief minister of Bihar in 2005, after managing to dislodge Lalu, who had ruled directly as well as through proxy (through his wife Rabri) for a period of 15 years and brought the state to the point of an economic collapse.

Ironically, for the first half of his political career, Nitish propped up Lalu, even though he knew that Lalu wasn’t fit to govern. Journalist Sankarshan Thakur put this question to Nitish in his book Single Man: “Why did you promote Lalu Yadav so actively in your early years?” he asked.

And surprisingly, Nitish gave an honest answer. As Thakur writes “‘But where was there ever even the question of promoting Laloo Yadav?’ he mumbled…’We always knew what quality of man he was, utterly unfit to govern, totally lacking vision or focus.'” Given this, what Nitish thinks of Lalu is totally on record.

So why then did Nitish decide to support him? “‘There wasn’t any other choice at that time,’ Nitish countered…’We came from a certain kind of politics. Backward communities had to be given prime space and Laloo belonged to the most powerful section of backwards, politically and numerically.'”

It is now Lalu’s turn to return the favour to Nitish. Also, Lalu knows that with the alliance of three parties, his party will have as many seats in the Bihar assembly as Nitish’s JD(U) or probably even more. This will allow him to extract his pound of flesh on the pretext of allowing the alliance to survive. And that is what he is interested in. Hence, what Lalu has drank is an ‘elixir’ and not poison, as he would like us to believe.

The column originally appeared on DailyO on June 9,2015 

Two charts that clearly tell you why the Indian economy is not in good shape

On 29 May 2015, the Ministry of Statistics and Programme Implementation (Mospi) released figures for gross domestic product (GDP) growth last year. The GDP is a measure of the size of an economy. According to this data, the Indian GDP grew by 7.3 percent during 2014-15.

This perky number is the result of a new method of calculating GDP. In January 2015, Mospi, using this new method of projecting growth, had projected a growth of 7.4 percent for 2014-15. Before this number came out, the growth projected by the RBI was at 5.5 percent. The GDP growth finally came in at 7.3 percent.

Not many people believe this higher number given that real economic data like car sales, bank lending, exports, and corporate profits have all been pretty dull. And GDP ultimately is a theoretical construct unlike the real data.

In fact, RBI Governor Raghuram Rajan, in the interaction he had with the media after presenting the monetary policy on 2 June, said: “In the eyes of the rest of the world, it is a discrepancy why we feel the need for rate cuts when the economy is growing at 7.5 percent. Most economies growing at 7-7.5 percent are just going gang-busters and the issue there would be to restrain rather than accelerate growth.”

The answer lies in the fact that there is something not quite right about the GDP growth number. As Rajan put it: “We still have very weak investment. Corporate results, even after adjusting for slow inflation, have been quite weak, suggesting that demand is yet to pick up strongly…Even with the 7.5 percent growth number, there is some discussion of how much that includes special factors in the last quarter, including excise taxes and subsidies. When you subtract that, the growth in the last quarter does not look as strong.”

In fact, Rajan’s argument can be taken further by looking at the accompanying chart 1.

Chart1


This chart essentially maps the nominal GDP growth as per the old method as well as the new method. Nominal GDP is essentially GDP growth which has not been adjusted for inflation. The blue curve shows GDP growth using the old method whereas the red curve shows GDP growth as per the new method. The data for the GDP growth as per the new method is available only for the last few years.

While, there may be a lot of debate around the validity of the new method of calculating GDP, what it clearly shows is that nominal GDP growth has been falling for a while. In fact, the red and the blue curves almost go hand in hand over the last few years.

As Anindya Banerjee of Kotak Securities puts it: “Though the real GDP growth has created quite a bit of controversy, it’s the nominal growth picture which has immense information value. There is continuity between the old series and the new series and they together are pointing towards the weak state of the economy.”

Now take a look at chart 2 which shows corporate profits expressed as a proportion of GDP. In the last financial year they stood at 4.3 percent of the GDP, which was a 10-year low.

Chart2


As Banerjee, who brought these charts to my notice, puts it: “Nominal GDP, which portrays both real growth as well as inflation in the economy, has a strong correlation with the taxes that government earns, the earnings of corporates and hence the price multiples that the equity markets enjoy. A decadal low in the nominal GDP is in line with the decadal low witnessed in corporate profit growth or share of corporate profits in GDP. Corporate profits as a share of GDP is at lowest level seen at least since FY04, at 4.3 percent.”

These two charts clearly tell us that the Indian economy is not in a good shape, despite wherever the real GDP growth number might be. It will be difficult for the government to spend its way out of trouble simply because it won’t earn enough taxes to do that. If it wants to spend more and pump prime the economy then it will have to borrow more and in the process compromise on fiscal discipline. The government borrowing more will also push up interest rates and that will have its own share of repercussions.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on The Daily Reckoning on June 9, 2015