Why India should be growing dal and not sugarcane

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Dal prices, in particular tur dal (also known as arhar dal or pigeon pea) prices, have been on fire. The price of tur dal even crossed Rs 200 per kg sometime back. As I write this, the price of tur dal is still hovering around Rs 200 per kg.

This trend has prevailed over the last few years where dal prices have reached astonishingly high levels at various points of time. Why is that the case? The reasons are both from the demand as well as supply side.

As rural incomes have gone up over the last few years, the demand for dal as a source of protein has gone up. The supply hasn’t been able to keep pace. Over and above this, short term weather trends have led to massive spikes in dal prices.

In 2007-2008, India produced 3.08 million tonnes of tur dal. In 2014-2015, the total production was down to around 2.78 million tonnes, which was lower than the production in 2007-2008. The total production in 2013-2014 had stood at 3.34 million tonnes.

Hence, between 2013-2014 and 2014-2015, there was a significant fall in production of tur dal. Economists Ashok Gulati and Shweta Saini in a column in The Indian Express estimate that the “the consumption of tur hovers between 3.3 to four million tonnes.” Hence, there is a clear gap between the demand for and the supply of tur dal.

What has not helped is the fact that the yield has more or less remained flat. In 2007-2008, 826 kg of tur dal was produced per hectare. By 2013-2014, this number had risen to only 859 kg per hectare, at a rate of less than 1% per year (around 0.7% to be precise).

As Dharmakirti Joshi and Dipti Deshpande economists at Crisil Research point out in a recent research note titled Every third year, pulses catch price-fire: “Pulses account for about 20% of area under foodgrain production, but less than 10% of foodgrain output. Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2% average in the last 20 years, while acreage has grown even lesser at 0.8%. Not surprisingly, yield rose only 0.9%.”

There are fundamental reasons behind why tur dal prices in particular and dal prices in general have been on fire. Over and above this there is a more recent reason as well. The monsoon this year was at 86% of its long period average. And this did not help either. As Joshi and Deshpande point out: “Pulses are highly risk-prone crops because most of the production is rain-dependent. Barely 16% of total pulses area is covered by irrigation and hence the crop is highly vulnerable to monsoon shocks.”

Also, the current incentive structure of the government is in favour of growing rice, wheat and sugarcane. As Gulati and Saini point out: “The government needs to create a crop-neutral incentive structure for farmers, which is at present skewed in favour of rice, wheat and sugarcane. Much of the subsidies on fertilisers, power, and irrigation go to these crops. These subsidies amount to more than Rs 10,000/ hectare. If the same amount were given to pulse growers, they would be incentivised to produce more.”

The government declares a minimum support price for rice and wheat and actively procures grains through the Food Corporation of India and other agencies.

It declares a minimum support prices for dal as well, but doesn’t actively procure it. Given this, while the farmer is sure of the government buying the rice and wheat that he produces at a certain time, the same certainty doesn’t exist in case of dal. As Joshi and Deshpande point out: “Production is also risky because of inadequate post-harvest storage facilities, absence of assured marketing outlets (unlike wheat and rice) and lack of government assurance for purchase under public distribution.”

The irony is that with economic incentives like assured procurement by the government lead to the farmers producing water intensive crops in water-scarce areas. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “Punjab and Haryana need to change their choice of crops and reduce growing water-hungry rice…Growing sugar cane, even more water hungry than paddy, in water-scarce Maharashtra is equally contraindicated—especially since the country happens to be surplus in sugar most of the time, and exporting sugar amounts to exporting water.”

As Ninan further points out: “The high cane prices make the crop attractive to farmers who otherwise might have grown less water-intensive crops, especially in stretches where water is not abundant. But one price distortion leads to another, and then another.”

With this entire structure in place enough dal doesn’t get grown. As Gulati and Saini point out in another column in The Financial Express: “Pulses need much less water, are nitrogen-fixing, and therefore do not need much chemical fertilisers either. They can thus save on large input subsidies (power, irrigation and fertilisers), much of which are normally cornered by rice, wheat and sugarcane as these crops have high irrigation cover and higher fertiliser consumption.”

So even though growing dal needs lesser water not enough dal is grown because the prevailing economic incentives go against it. And this anomaly is not going to go away anytime soon.

The column originally appeared on The Daily Reckoning on Nov 30, 2015

Will the 7th Pay Commission recommendations lead to higher inflation?

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The advantage of writing regularly is that one can dwell into great detail on issues of national economic importance. Hence, this is the fourth column on the recommendations of the Seventh Pay Commission this week.

When I started writing regularly in the media nearly 12 years back, the communication with the readers was largely one way. One wrote a piece and then forgot about it. There was no feedback coming in from the readers. There was no way of figuring out whether something one had written had actually been read. If it had been read then what had the readers thought about it?

Some feedback came from the colleagues, if they did read, what one had written (normally they didn’t). The bosses did give feedback once in a while, especially if they didn’t like something one had written.

But now with the advent of the social media, feedback (both good and bad) keeps coming in all the time, and questions keep getting asked. Also, if readers like something they share it. This gives some idea of what the readers are actually interested in. There is constant communication with the readers these days and that’s a good thing.

One of the questions that I recently got asked on Twitter was: “Will the 7th Pay Commission recommendations lead to higher inflation?” As I have mentioned multiple times this week, the Pay Commission recommendations will lead to an increased spending of Rs 1,02,100 crore by the government, to pay higher salaries of central government employees and higher pensions of retired central government employees.

How will this lead to inflation? A part of this increase in salary and pensions will be spent to buy goods and services. As this money chases the same amount of goods and services, prices will go up. This logic seems very straightforward—as straightforward as saying, a cut in interest rates leads to people and companies borrowing more, which is something one hears all the time.

In fact, that is how things played out in the aftermath of the Fifth as well as Sixth Pay Commissions, once their recommendations had been accepted. The higher salaries and pensions led to a higher consumption which led to higher inflation.

As Crisil Research points out in a recent research note 7th Pay Commission: A non-inflationary boost to consumption and investment: “During the Fifth Central Pay Commission(CPC) payout, overall inflation rose by 657 basis points[one basis point is one hundredth of a percentage] on-year in fiscal 1999, while non-food inflation in the same year rose only 141 boints. During the Sixth CPC payout years, however, overall inflation rate rose by 611 basis points on-year between fiscals 2009 and 2010. But this time the increase in non-food inflation was higher and lagged – up 492 bps during fiscals 2010 and 2011.”

So will this phenomenon play out this time around as well? A major reason for inflation the last two times was the fact that the Pay Commission increases came much after they were due. The Sixth Pay Commission increase was due from January 2006. But the report was submitted only in March 2008 and accepted by the government in August 2008. Hence, arrears had to be paid and they were paid only in 2008-2009 and 2009-2010.

This meant that people suddenly ended up with a lot of money in their hands, as payments were made. As Crisil Research points out with regard to the Sixth Pay Commission: “Large arrear payments coincided with the rapid rise in rural wages adding to core inflationary pressures then. These two factors are expected to be absent, this time.”

This time the salary increases are due from January 2016. Unlike the last time, the Pay Commission recommendations have come in before the due date. Also, chances are that the government will implement these recommendations starting from April 2016, the next financial year. Given this, only a limited amount of arrears will have to paid, meaning that people will not suddenly end up with a lot of money in their hands, as they had last time around.

Another factor that needs to be kept in mind is that most factories are not running full steam at this point of time. As Reserve Bank of India governor, Raghuram Rajan, recently pointed out, most factories are running 30% below capacity as of now.

This means that factories can easily ramp up supply if the demand goes up due to higher consumer spending, without leading to higher prices. Typically, if factories are running full steam, a rise in demand cannot be matched immediately with a rise in supply and that leads to prices going up. But that sort of scenario is unlikely to playout as of now.

Over and above this, as and when the recommendations of the Seventh Pay Commission are accepted by the central government, pressure will mount on state governments to increase the salaries and pensions they pay as well. The state government increases won’t happen overnight and will take some time to happen.

And this will allow the inflation due to increased demand, if any, to spread out over a period of time.

As Crisil Research points out: “State governments – which have more employees than the Central government – tend to implement these with a lag. Therefore, while there is a push to consumption demand, it takes place over time allowing supply-side factors to adjust wherever possible.”

The column originally appeared on The Daily Reckoning on Nov 26, 2015

Khada hai khada hai was a Sufi song: A dreamy conversation with Pahlaj Nihalani


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It is 12.30AM at night and I am sleeping. In my sleep I am dreaming about Pahlaj Nihalani. I am actually talking to him. We are having a conversation.

“Sir if you could produce a film with a song khada hai khada hai khada hai, why don’t you like kissing anymore?” I asked him a simple question to start the proceedings.

“You are misquoting the song?”

“Misquoting the song?” I repeated, wondering how does one misquote a song.

“Well you are just singing a part of it,” explained Mr Nihalani, the censor board chief and started humming it himself: “Khada hai khada hai khada hai, dar pe tere aashiq khada hai.”

“This is the complete line?”

“Yes.”

“So?”

“This is a Sufi song. In fact, it was India’s first filmi Sufi song.”

“Sorry?” I asked, wondering what made one of India’s grossest double meaning songs, a Sufi song.

“Let me explain,” continued Nihalani. “The lover is calling out to his beloved and singing that he is standing on her doorstep waiting for her to open the door.”

“Yes?”

“The beloved is essentially a representation of God, you see and the lover is her devotee,” he explained.

“Ah,” I said surprised at this masterful spin that Nihalani had come up with.

“Imagine a Sufi song in Hindi cinema of the 1990s. They used to be full of these double meaning songs. Choli ke peeche/andar kya hai and all that. This was a time when the world hadn’t discovered Nusrat Fateh Ali Khan sab. Or Abida Parveen for that matter. I was ‘so’ ahead of the times.”

“But Sir what about lal duppette waali tera naam to bata?” I asked, trying to get back into the game.

“What about it bacche?”

“Well there is a line in the song where the heroines sing, “har ajnabi ke liye khidki nahi khulti,” and in a very suggestive way slightly raise the hemline of their white mini-skirts. This clearly wasn’t a good projection of Indian culture that you now seem to be so passionate about?”

“Ah, the tragedy of my life,” shouted Nihalani.

“Nobody ever understood the real meaning behind my songs.”

“Real meaning?” I asked.

“Yes. That was a song against pollution. I was telling the people to keep their windows closed till the air gets a little cleaner. Again, I was ahead of the times. Now we at least have Modi Kaka’s Swacch Bharat.

“And what about main maal gaadi tu dhakka lagga? What was that all about?” I asked, hoping to catch the censor chief off-guard.

“Oh that was a song for the Indian Railways,” he replied.

“Indian Railways?”

“You know that the passenger service of Indian Railways is a loss making operation?”

“So?”

“That was my way of indirectly telling the government that they should be running more freight turns, if they wanted the Railways to be profitable and sustainable.”

“Ah.”

“And look at what happened?” he asked rhetorically.

“What happened?” I repeated.

“Lalu Prasad Yadav stole my idea when he became the Railway Minister in 2004. He gave immense importance to freight operations and revived the Railways,” explained Nihalani. “I never got the respect I deserved until Modi Kaka came along.”

“Hmmm. But what about angna main baba duare pe ma?

“What about it?”

“The song starts with the heroine Shilpa Shirodkar lifting her ghagra to reveal her thigh. It is followed by the heroine and a string of women extras gyrating their chests and doing other suggestive movements.”

“So?” Nihalani persisted.

“Well if you can produce that sort of a song, what is wrong with James Bond kissing?”

“Well, again you are seeing only what unfolds on the screen.”

“So what is the ‘deeper’ meaning?” I asked, trying to be sarcastic.

“This was a song against obesity.”

“Obesity?” I asked, with my head ready to spin.

“Yes. Look at the dance movements. I have just tried to Indianise aerobic movements. I had given special instructions to the choreographer to do that.”

“Oh.”

“Yes. And this was a time when even Baba’s Yoga was not on the scene,” he explained.

“Yes that is pretty recent,” I said accepting defeat.

“And it was up to me that the country remained healthy until Modi Kaka came along.”

This was when a bucket full of water landed up on me and the girl-friend yelled at the top of her voice, “can you stop shouting Modi Modi even in your sleep.”

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek. On most days he writes on finance and economics).

This spoof originally appeared on Huffington Post India on Nov 26, 2015

Will damages of the 7th Pay Commission be as bad as the Sixth?

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This is the third time this week I am writing a column around the Seventh Pay Commission recommendations. In this column I would like to address the total financial impact of the recommendations of the Seventh Pay Commission.

As I have mentioned in the earlier columns, the Commission has recommended an overall increase of 23.6% in the salary of the central government employees and the pensions of those who have retired from central government jobs. This is likely to cost the government Rs 1,02,100 crore in 2016-2017, the Commission has estimated.

The report estimates that this increase will work out to 0.65% of the gross domestic product (GDP) in 2016-2017.  In comparison, the awards of the Sixth Pay Commission had worked out to 0.77% of the GDP.

The question is how much will it impact the finances of the central government, if the recommendations where to be accepted. First and foremost Pay Commission recommendations are usually accepted. And there is no reason that they won’t be accepted this time around as well.

Further, it is very difficult to estimate by exactly how much the government finances will be affected , given that there is no way of figuring out what the budget makers of the government are thinking. Nevertheless, it is safe to say that the government will have to figure out a way of either increasing its earnings or cutting down on its expenditure, in order to be able to finance this expenditure (as we saw in yesterday’s edition of The Daily Reckoning).

If we look at the budget numbers between 2005-2006 and 2015-2016, the government expenditure has gone up at the rate of 13.4% per year. The government receipts (i.e. the tax and the non-tax revenue of the government less its borrowings) have gone up at the rate of 13% per year. The government expenditure has been going up on a larger base at a faster rate.

Of the extra Rs 1,02,100 crore the government will have to spend, Rs 73,650 crore will have to be borne on the general budget and the remaining on the railway budget. Assuming that the trend of the last ten years will continue in 2016-2017, with an extra expenditure of Rs 73,650 crore, the fiscal deficit of the government is likely to jump to 4.5% of the gross domestic product (GDP) (I will spare you the Maths here).

In 2015-2016, the government has targeted a fiscal deficit of 3.9% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends. And this isn’t a good thing, given that the government is trying to achieve a fiscal deficit of 3.5% of the GDP by 2016-2017 and 3% of the GDP by 2017-2018.

Long story short—the government cannot continue operating the way it currently is. It will have to find out ways to cut its expenditure on other fronts as well increase its revenues. If it does not do that there is no way it will be able to finance the extra spending on salaries and pensions without managing to increase its expenditure as well as the fiscal deficit in the process. And that won’t be a good thing for the Indian economy.

A higher fiscal deficit will have to be financed out of higher borrowing by the government. This will leave lesser amount of money for the private sector to borrow and in effect push up interest rates. And that is something the government won’t want to do.

In fact, the impact of the recommendations of the Seventh Pay Commission don’t end at the central government level. As soon as the central government accepts the recommendations of the Seventh Pay Commission, demands will start for the state governments to increase their salary and pension payouts as well.

That is how things had played out after Sixth Pay Commission recommendations were accepted. The Sixth Pay Commission was due from 2006 onwards, but the Pay Commission report was submitted only in March 2008. The recommendations were accepted in August 2008. Given this, the government had to pay arrears to the employees.

These arrears were paid in 2008-2009 and 2009-2010, with a split of 40:60. This pushed up the fiscal deficit of the central government big time. The fiscal deficit in the year 2007-2008 had stood at 2.54% of the GDP. In 2008-2009, it hit 5.99% and then climbed to 6.46% of the GDP in 2009-2010 (as can be seen from the accompanying table).

There were other reasons as well for this massive jump in the fiscal deficit, from debt of farmers being waived off, to the United Progressive Alliance government getting into the pump priming mode in the aftermath of the financial crisis which started in mid-September 2008, to the expansion of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) to all districts of the country from the original 200 districts.

YearFiscal deficit of the central govt(% of GDP)Combined fiscal deficit of the state govts (% of GDP)Total
2007-20082.541.514.05
2008-20095.992.398.38
2009-20106.462.919.37
Source: http://planningcommission.nic.in/data/datatable/1203/table_27.pdf

 

After the central government, the state governments also had to start raising salaries as well as pensions. The Seventh Pay Commission had commissioned a study by IIM Calcutta to “ascertain the fiscal impact of the previous Commissions’ awards on the states”.

The study found that: “that a significant number of States follow the recommendations of the Central Pay Commission. Equally, there is significant plurality of States that design their own pay awards based on the recommendations of their own State Pay Commissions, which of course do consider the recommendations the Central Pay Commission.”

Hence, the salaries of the employees of the state government employees also went up after the Sixth Finance Commission recommendations were accepted by the central government. This led to the combined fiscal deficit of the states jumping from 1.51% of the GDP in 2007-2008 to 2.91% of the GDP in 2009-2010.

The combined fiscal deficit of the centre as well as the states jumped from 4.05% of the GDP to 9.37% of the GDP. Things started to improve from 2010-2011 onwards. As the Seventh Finance Commission report points out: “The empirical analysis conducted indicates that the macroeconomic impact on States’ finances tends to taper off in two years in most cases.” So, government finances were impacted for two years.

Will a similar scenario play out this time around as well? While the fiscal deficits of the centre as well as the states are likely to jump up, the quantum of the jump may not be as much, because this time the chances of arrears having to be paid are low (at least in case of the central government).

As the Seventh Pay Commission report points out: “The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears…However, Seventh Central Pay Commission recommendations entail, at best, payments of marginal arrears.”

This time around the chances are that the recommendations of the Commission will be implemented from April 1, 2016, onwards, and hence will involve payment of marginal arrears. In case of state governments, the arrears will depend on how soon the state governments agree to salary increases.

So can we safely say that the damages of the Seventh Pay Commission will not be as bad as the damages of the Sixth Pay Commission, which screwed government finances for two years? The fact is that the Seventh Pay Commission has recommended one rank one pension for central government employees as well. And that remains the joker in the pack.

The column originally appeared on The Daily Reckoning on Nov 26, 2015

Ruminations on the Bihar election

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I normally stay away from writing on politics given that I don’t track it closely enough. Nevertheless, having been born and brought up in erstwhile Bihar, the politics of Bihar has always interested me. And given this, I was closely tracking the state assembly election results when they were declared earlier this month.

As the election trends started to come in, the Bhartiya Janata Party (BJP) led National Democratic Alliance seemed ahead. The experts and analysts on news channels immediately started offering reasons for the same. They said that the Grand Alliance leader and the chief minister of Bihar, Nitish Kumar, had turned arrogant during his second term. He had lost the connect with the youth of Bihar, who were now batting for Narendra Modi. The caste factor had finally been destroyed in Bihar (something remarkably stupid to say on live TV) and so on.

I did not hear any of these experts say, let’s wait for more trends as well as results to come in. Things started to change after sometime and the Nitish Kumar led Grand Alliance raced ahead and eventually won the elections convincingly, winning 178 out of the 243 seats in the state assembly.

As the Grand Alliance surged ahead the narrative of the experts and analysts on TV also changed. They now offered reasons on why Nitish Kumar was such a star. Apparently, there was no anti-incumbency at work. The women had come out in full support of Kumar. Further, Lalu Prasad Yadav’s supporters (the Muslims and the Yadavs) had voted whole-heartedly for the Grand Alliance, even though they knew that Lalu would not become the chief minister.

At the same time, it was said that Modi and Amit Shah’s brand of divisive politics had not worked. The RSS chief Mohan Bhagwat’s comment of taking a relook at reservation also did not go down well with the voters of Bihar.

The entire analysis offered on TV during the counting of votes and after the declaration of results was an excellent example of what economists call the teleological fallacy. As John Kay writes in Obliquity—Why Our Best Results Are Achieved Indirectly: “The teleological fallacy, which infers causes from outcomes, is one of the oldest mistakes people make…In the business and political spheres the assumption that good or bad outcome derives from good or bad design remains pervasive.”

Why does this happen? As Kay puts it: “The human mind is programmed to look for patters and to seek causes.”

So what did really happen in Bihar? In the 2014 Lok Sabha elections, the NDA had got 38.8% of the votes. In the 2015 state assembly elections this fell to 34.1%. In the 2014 Lok Sabha elections the alliance comprising of Lalu Prasad Yadav’s Rashtriya Janata Dal, the Congress Party and the Nationalist Congress Party, had polled in 30.2% of the votes.

Nitish Kumar’s Janata Dal(United) had polled in 16.04% of the votes. But Kumar was not in alliance with Lalu and the Congress. Hence, their vote was split and the NDA won the majority of the seats in the state during the Lok Sabha elections.

If there had been an alliance between Nitish, Lalu and the Congress, they would have polled in a little over 46% of the votes, which would have been more than the 38.8% that the NDA polled.

This time around Lalu, Nitish and Congress got together and they got 41.9% of the votes. The NDA on the other hand won only 34.1% of the votes. The point is that the anti-Modi vote was always in the majority, only this time around the votes were not spilt.

This was the real reason why Modi led NDA lost Bihar so badly. Now whether the voter voted against Modi because of cow politics, Shah’s Pakistan comment or Bhagwat’s reservation comment, that only he knows. And the vice versa is also true i.e. whether the voter voted for Kumar because of his development policies or caste affiliation, that only he knows.

The analysts and the experts can only speculate.

(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 November 25, 2015