The Clean Up of Public Sector Banks is On, but the Basic Problem Still Remains

RBI-Logo_8

Earlier this week, the Reserve Bank of India(RBI) released the biannual Financial Stability Report. And this is how the most important paragraph of the report reads: “The gross non-performing advances (GNPAs) of SCBs sharply increased to 7.6 per cent of gross advances from 5.1 per cent between September 2015 and March 2016 after the asset quality review (AQR). A simultaneous sharp reduction in restructured standard advances ratio from 6.2 per cent to 3.9 per cent during the same period resulted in the overall stressed advances ratio rising marginally to 11.5 per cent from 11.3 per cent during the period. PSBs continued to hold the highest level of stressed advances ratio at 14.5 per cent, whereas, both private sector banks (PVBs) and foreign banks (FBs), recorded stressed advances ratio at 4.5 per cent.”

What does this mean? As on March 31, 2016, the gross non-performing advances (or bad loans) of banks stood at 7.6% of the loans that they have given out. This figure had stood at 5.1% as on September 30, 2016. It had stood at 4.6% as on March 31, 2015.

This basically means that between March last year and March this year, the bad loans of banks have gone up by 300 basis points. One basis point is one hundredth of a percentage. Between September 2015 and March 2016, the bad loans of banks have gone by 250 basis points.

Nevertheless, this is good news. But how can bad loans of banks going up be good news?  It is good news because the banks (particularly public sector banks) are finally getting around to recognising bad loans as bad loans. Up until now, they were basically postponing the recognition of bad loans as bad loans by passing them as restructured loans.

A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

This is how banks had been helping many borrowers who were no longer in a position to repay the loans they had taken on. In many cases, restructuring was just an exercise to postpone the recognition of bad loans. Even after the loans were restructured many borrowers, were not in a position to repay their loans.

This becomes clear from looking at the stressed advances ratio of the banks. The stressed advances figure is obtained by adding the total bad loans to the restructured assets. Over the last few years, the stressed advances ratio of banks has gone up at a rapid rate, as banks restructured loans at a rapid pace.

This has now stopped. The restructured asset of banks as on March 31, 2016, fell to 3.9% of loans. In September 2015, it had stood at 6.2% of total advances. This basically means that the strategy of banks to postpone recognition of bank loans by passing them off as restructured assets has come to an end. Given this, the overall stressed assets ratio of banks as on March 31, 2016, stood at 11.5%, against 11.3% as on September 30, 2015.

A stressed asset ratio of 11.5% was basically obtained by adding bad loans of 7.6% to restructured assets of 3.9%. In September 2015, the restructured assets had stood at 6.2% whereas the bad loans had stood at 5.1%, leading to a stressed assets ratio of 11.3%.

What this tells us is that between September 2015 and March 2016, the stressed assets ratio has gone up by just 20 basis points from 11.3% to 11.5%. Indeed, this is good news for the simple reason that banks are now being forced to recognise bad loans as bad loans and not pass them of as restructured assets like they were doing earlier.

This is a huge feather in the cap of both the Reserve Bank of India as well as the Narendra Modi government. The basic problem is with public sector banks which gave out loans in the past primarily to many crony capitalists, which these borrowers are now not in a position to repay.

The stressed asset ratio of public sector banks as on March 31, 2016, stood at 14.5%. As on September 30, 2015, the ratio had stood at 14.1%. The stressed asset ratio of public sector banks is now going up at a slower rate than it was in the past, as can be seen from the accompanying table.

 

DateRatio
March 31, 201614.50%
September 30, 201514.10%
March 31, 201513.50%
September 30, 201412.90%
March 31, 201411.70%
September 30, 201312.30%
March 31, 201310.90%
  

 

What this means is that public sector banks are cleaning up their act by recognising more and more bad loans. This wasn’t happening in the past. Now it is important that they go after the borrowers (especially the larger ones) and recover as much of the loans as they can. The more the loans they can recover, the lesser will be the capital that the government will have to put into these banks, to get them up and running again.

Also, it is important to point out that this cleaning up has been possible because of the asset quality review initiated by the Rajan led RBI. The RBI asset quality review covered 36 banks (including all public sector banks). This review accounted for 93% of the total lending carried out by the scheduled commercial banks.

As the RBI Financial Stability Report points out: “The exercise sought to validate objective compliance of banks with applicable income recognition, asset classification and provisioning (IRACP) norms and exceptions were reported by the supervisors as divergences in asset classification / provisioning.” This basically means that RBI was checking for whether banks are recognising bad loans as bad loans.

Indeed, the fact that the bad loans ratio has jumped to 7.6%, tells us that many banks were not recognising bad loans as bad loans, and that anomaly has been corrected. The first step in tackling a problem is to recognise that it exists. The Indian banks, in particular, the public sector banks have now started to do that.

The Financial Stability Report suggests that “under the baseline scenario, the gross non-performing assets ratio [bad loans ratio] may rise to 8.5 per cent by March 2017 from 7.6 per cent in March 2016. If the macro scenarios deteriorate in the future, the gross non-performing assets ratio may further increase to 9.3 per cent.” The point is that the worst is still not over for India’s banks.

Also, this basically means that banks need to be aggressive about recovering their loans. Further, it’s time that the government as the owner of public sector banks, starts forcing the defaulting promoters to give up on their equity.

Nevertheless, the bigger problem still remains. The bigger problem is the fact that the public sector banks continue to remain government owned. As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post Crisis World: “Spend a lot of time in field, and it is all too easy to find evidence that the state is not a competent banker.”

The Indian public sector banks have ended up in trouble more than a few times before. One of the reasons for this is the politicians forcing these banks to lend to crony capitalists. And as long as these banks continue to remain government owned, that risk remains, especially given that it is crony capitalists who ultimately finance the electoral ambitions of India’s politicians.

The column was originally published in Vivek Kaul’s Diary on June 30, 2016

Of Venkaiah Naidu, Air India and Privatisation by Malign Neglect

VenkaiahNaidu

Yesterday afternoon something weird happened on Twitter.

An irate flyer sent out four tweets against Air India. No it wasn’t me. Here are the four tweets:

1) I had to travel to Hyderabad by Air India AI544 which is to depart at 1315 Hrs… was told on time…reached airport by 1230 Hrs.

2) was informed at 1315hrs that flight was delayed as d pilot had not yet come.Waited up to 1345 Hrs, boarding didn’t start. returned 2 home.

3) Air India should explain how such things are happening. Transparency and accountability are the need of the hour.

4) Hope Air India understands that we are in the age of competition. Missed an important appointment.

The tweets were sent out by senior BJP politician and the Union Minister for Urban Development, Housing & Urban Poverty Alleviation as well as Parliamentary Affairs, M Venkaiah Naidu. Naidu is a heavy weight in the Modi government. The fact that he took to Twitter to criticise the government owned airline means he must have been extremely irritated by the airline’s failure to depart on time.

Air India replied in true government style saying that the pilot was stuck in a traffic jam and an enquiry had been ordered. (I wonder why pilots of other airlines do not get stuck in traffic jams?)

Minister Naidu got a feel of what happens when people travel Air India. This is a good thing where the politicians and the bureaucrats get a feel of how the system they help build and run, actually works.

As Reserve Bank of India governor Raghuram Rajan, had said in a speech sometime back: “A lot of officials, including myself, learn the difficulties of working in India as an ‘aam aadmi’ only once we leave office, lose the assistant, the assistant to the assistant, and the assistant to the assistant’s assistant. Post retirement, and I have seen this with all the people I know, they realise the system is much harder to deal with.”

It was Naidu’s opportunity yesterday to have that kind of day. The sad part is that those who run Air India still don’t get it. The airline has managed to accumulate huge losses over the years and continues to survive on borrowing as well as equity infusion by the government (i.e. basically the taxpayer).

Anyone in their right mind, stopped traveling Air India a while back. The airline now runs simply because of government employees who when travelling officially have no other option (in most cases) but to travel in the airline and pay the full fare.

The airline now has 14.7 per cent market share. This has been a huge fall from the days when it had 100% of the domestic market share given that no private airlines were allowed to operate. (The domestic airline back then was called Indian Airlines. There was also Vayudoot, another government owned airline, which travelled to smaller locations).

This is nothing but what Ruchir Sharma calls privatization by benign neglect. As he writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “India…has adopted a de facto policy of what I can only describe as privatization by malign neglect. The political class can’t bring itself to sell off the old state companies, or to reform them either. Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance. Thirty years ago state-owned Air India was basically the only way for Indians to fly, but the rise of agile private airlines including Jet and Indigo, has reduced its share of flights to less than 25 percent.” As mentioned earlier Air India now has 14.7% of the domestic market share.

The business flyer who is willing to pay a premium and for whom time is of utmost importance, has more or less abandoned Air India and moved on to other airlines. Guess, it’s time that minister Naidu also does that, the next time he has to reach on time for any meeting outside Delhi.

Air India is not the only example of the government not being able to withstand competition. Sector after sector has seen the government companies being decimated wherever they have had to face competition. As Sharma writes: “The same goes for telecommunications, where former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India’s 900 million telecom subscribers.”

But the government (this government as well as the ones before it) have kept these companies going. Of course, a lot of taxpayer money which could have been better utilised elsewhere has been lost in the process. Air India has lost close to Rs 35,000 crore between 2010-2011 and 2015-2016. Last year it managed to make an operational profit primarily because of lower oil prices.

The point being that it would have been better for the government to have sold off these companies long back. As Sharma writes: “The state would have done a lot better to simply sell of these companies when they were still valuable, but now it is losing money on them hand over fist, and they are worth a pittance. This approach—refusing either to privatize or protect state monopolies—is the worst possible combination for government’s finances.”

And that is precisely what the previous governments did. The Narendra Modi government continues to run on the same principle. One doesn’t expect radical decisions from a government which couldn’t even push through a five basis points interest rate cut on the Employees Provident Fund(EPF). One basis point is one hundredth of a percentage.

The airline business is a very tough and competitive business to be in. Any airline hoping to make a profit needs to be run by a professional who has some experience in the airline business. Air India has never had that luck for a sustained period of time. No such moves have been made by the current government either. This belief that bureaucrats and not specialists, can do everything, has been one of the primary reasons behind the degradation of India.

In fact, Air India has now reached a stage where even if the government were to try selling it, there would be no buyers. As civil aviation minister Ashok Gajapati Raju said sometime back: “Its (Air India) books are so bad. I don’t think that even if it is offered, anybody would come for it.”

The more things change the more they remain the same. The taxpayer will continue paying for this national loot.

The column originally appeared in Vivek Kaul’s Diary on June 29, 2016

Brexit 101: All You Wanted to Know but were Afraid to Ask

euro

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again.

On June 23rd 2016, the United Kingdom of Great Britain voted to leave the European Union. In the era of Twitter tags, this event has come to be known as Brexit. David Cameron, the prime minister of Great Britain, resigned very soon after the result was announced.

The financial markets have been freaking out since then.  The question is what is Brexit all about and why are people worried about it. Before answering this, it is important to go back into history and understand the context that led to the formation of the European Union.

What led to the formation of the European Union?
The origins of the European Union can be traced to the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries (which were France, West Germany, Italy and the three Benelux countries i.e. Belgium, Netherlands and Luxemburg) in 1958.

The goal of ECSC was to create a common market for coal and steel in Europe. The EEC on the other hand worked towards advancing economic integration in Europe. The economic integration of Europe was deemed to be necessary by many experts to create some sort of bond between different countries in a continent destroyed by extreme forms of nationalism during the Second World War.

The Second World War had lasted from 1939 to 1945 and had more or less destroyed the European countries. Hence, the idea was that if economic integration happened, peace would automatically prevail.

When was the European Union formed?

These organizations (i.e. ECSC and EEC) gradually evolved into the European Union (EU) which was established by the Maastricht Treaty signed on December 9 and 10, 1991. The creation of a single European currency became an objective of the EEC in 1969, but nothing happened for the next two decades. It was only in the 1993, after the formation of the European Union by the passage of the Maastricht Treaty, that the members became bound to start a monetary union by January 1, 1999.

Currently, there are 28 countries which form the European Union. Further, there are 19 countries which use the euro as their currency (i.e. monetary union). The United Kingdom of Great Britain is not a part of the monetary union within the European Union. It has its own currency (i.e. the pound).

What were the advantages of the European Union?

The basic idea behind European Union was economic integration that led to peace. Let’s take the case of a company which makes cars in the United Kingdom. Before the European Union came into place, if the company wanted to sell its cars in Spain, it would have had to pay a tariff in Spain. (Not surprisingly, the British car companies were against the country leaving the European Union).

Or let’s consider someone British who wanted to work and enjoy the literary scene in Paris. Before the European Union came into place, he would have had to go through a long immigration process.

The European Union essentially did away with these problems and made the movement of both goods and people across the countries which became members, much easier than it was in the past.

So what happened in Great Britain?               

On June 23, 2016, the citizens of the United Kingdom of Great Britain voted 52:48 to leave the European Union. This wasn’t expected. Both opinion polls as well as experts had been predicting that Britain would vote to stay in the European Union. But as is the case more -often than not, experts and opinion polls turned out be wrong.

Around half of Great Britain’s exports currently go to the European Union. At the same time around half of Great Britain’s imports come from the European Union[i]. Around one-third of Great Britain’s financial services exports are to the European Union. At the same time, more than half of the cross border lending that the banks of Great Britain carry out is to the European Union. Further, Great Britain receives half of its foreign direct investment from the European Union[ii].

In the days to come all this will have to be renegotiated with the European Union. It is estimated that negotiations will have to be carried out with 60 non Euro Union countries where trade as of now is governed by European Union rules[iii].

So why did Britain leave the European Union?

Given such strong trade as well as financial linkages, why did Britain leave the European Union? The major reason being now offered is that immigration is now a major issue in Britain. Given that, English is the second language of many Europeans, and the main language in Britain, it was easy for the continent based Europeans to move to work to Britain than vice versa.

The other reason being offered is that many of the people who voted for Britain leaving the European Union, did not understand that voting for Britain leaving the European Union, actually meant that Britain would have to leave the union. As dumb as it sounds, there are several news reports which have offered this theory along with examples.

The thing with reasons is that they can also be offered after the event has happened. Hindsight bias plays a huge role here. Hence, I don’t think it is very important to understand why Britain has left the European Union. It is more important to understand how this will play out from here.

What happens now?

It needs to be mentioned here that Britain’s vote to leave the European Union is not legally binding. The British Parliament still needs to pass the laws which will repeal the laws that got Britain into the European Union. This will have to start with the 1972, European Communities Act[iv].

Further, the British leadership (David Cameron or his successor) will have to invoke Article 50 of the Lisbon Treaty. This will start the process formal legal process for Britain to get out of the European Union. At the same time, it will give them two years to negotiate the withdrawal.

Why is the world freaking out?

It is clear that Great Britain has a lot to lose by getting out of the European Union. But why is everyone else worried? The simple reason is that calls are now being made in other European nations, including Spain and France, to get out of the European Union. While, no one knows, how this will play out, if anything along these lines happens, it is likely to jeopardise the entire idea of an integrated Europe. If this were to happen, the future of the euro as a currency would be put to test. Also, if anything like this materializes, it will be next Lehman Brothers kind of moment.

One result of this will be that the European Union will be fairly aggressive in its negotiations with Great Britain (like it was with Greece). It will try and send out the message that any sort of dissent will not be tolerated[v]. This will be done so that message is carried over to any other country that is thinking about leaving the European Union.

Further, calls are now being made in Scotland, for a referendum to leave the Great Britain. In fact, the Scots as a whole have voted to stay in the European Union. If Great Britain decides to get out of the European Union, then Scots want to have their own referendum to get out of Great Britain, in order to stay in the European Union. So the disintegration of Great Britain is also a possibility now.

What about the financial markets?

The basic point is that financial markets hate any sort of uncertainty. And there is simply too much uncertainty surrounding the Brexit issue right now. Also, this has reinvigorated, the dollar as the safe haven trade all over again. This has led to money going out from all parts of the world and into the United States. This explains other currencies losing value against the dollar.

Further, as Nomura Research points out in a research note: “This extreme uncertainty in the City of London, one of the world’s largest financial centres, is anathema to global financial markets, especially when the global economy is as fragile as it is and as there are limited monetary and fiscal policy easing buffers available to most of the world’s major economies.”

Also, Brexit has thrown up the rising risk of Donald Trump winning the elections in the United States, scheduled in November 2016. As Anatole Kaletsky writes in a Project Syndicate column: “The “Brexit” referendum is part of a global phenomenon: populist revolts against established political parties, predominantly by older, poorer, or less-educated voters angry enough to tear down existing institutions and defy “establishment” politicians and economic experts.” And that has really got the financial markets worried.

The column originally appeared in the Vivek Kaul’s Diary on June 28, 2016

Footnotes:

[i] Doug Criss, The non Brits guide to Brexit, CNN, June 20, 2016

[ii] Brexit: Expect waves of contagion on Asia, Nomura Research, June 24, 2016

[iii] Nomura Research

[iv] Brian Wheeler & Alex Hunt, The UK’s EU referendum: All you need to know, BBC, June 24, 2016

[v] Ben Hunt, “Waiting for Humpty Dumpty”, Epsilon Theory, June 23, 2016

The economics of Udta Punjab

udta punjab

The recent release Udta Punjab highlighted the problem of drug addiction in Punjab. While, drug addiction is a global problem, Punjab has nearly 3.3 times more drug addicts per lakh than the Indian national average.

And why is that the case? From the supply side, the state shares a border with Pakistan. Hence, drugs are easy to smuggle in. The demand side is a little more complicated to explain.

The state saw a Green revolution starting in the mid-1960s, with the agricultural yield exploding, thanks to C. Subramaniam, the food and agriculture minister back then.

Subramanian came to know of a form of wheat developed in Mexico which could rapidly raise output. As Gurcharan Das writes in India Unbound: “C. Subramaniam was a man in a hurry and he chartered several Boeing 707s and flew in 16,000 metric tons of seed of this miracle wheat…Punjabi farmers still speak lovingly of Mexico’s Lerma Rojo, one of the earliest varieties to take root in their soil.”

And thus started the green revolution in Punjab. In order to support this, the government also started to procure rice and wheat directly from the farmers through the Food Corporation of India and other state procurement agencies.

The higher yields along with assured procurement led to the farmers of Punjab progressing. While the procurement policy is supposed to be pan India, the procurement is limited largely to a few states. As the Economic Survey for 2015-2016 points out: In Punjab and Haryana, almost all paddy and wheat farmers are aware of the [procurement] policy.” In 2013-2014, Punjab produced 11.1 million tonnes of rice. Of this, 8.1 million tonnes was procured by the government. This is the highest in the country.

What also helped is that there is no tax on agricultural income. Also, free power is available for farming. All this, has helped the Punjabi farmer. The first generation worked hard to spread the green revolution. The second generation carried on the good work. And the third generation, born into money, is enjoying the spoils.

This is along the lines of what happens to a typical family owned business. As Das writes, taking the example of Buddenbrooks by Thomas Mann, which he feels is the finest book ever written about family business: “It describes the saga of three generations; in the first generation the scruffy and astute patriarch works hard and makes money. Born into money, the second generation does not want more money…The third generation dedicates itself to art. So the aesthetic but physical weak grandson plays music. There is no one to look after the business and it is the end of the Buddenbrook family.”

Something similar seems to have happened in Punjab, where some part of the third generation has moved away from farming and gotten into drugs, given the access to easy money they have, due to the hard work put in by their grandparents. Some evidence of this can easily be found in the kind of songs that Punjabi popstars sing these days. The word dope, weed etc., keep cropping up in these songs.

The other interesting thing is the number of super expensive brand names that these songs refer to and espouse. From Jaguar to Audi to Gucci to Armani, they seem to have it all. This seems to be a good indicator of the fact that some part of the third generation after the Green revolution started, has gone away from farming and gotten into other things.

No other state in India (except perhaps Haryana) has this kind of music. What has helped is the astonishing rise in the price of land in the state. Also, land acquisition in Punjab is easier compared to many other Indian states given that the average size of a landholding in Punjab is around 9.3 acres, which is much bigger than many Indian states. Hence, large parcels of land are easier to buy.

Land sale has also brought in a lot of easy money. And some of this seems to have leaked into drugs.

The column originally appeared in the Bangalore Mirror on June 29, 2016

 

‘Dal’onomics 101: All you Wanted to Know but were Afraid to Ask

Toor_Dal_Tur_dal

The consumer price inflation number is released every month by the ministry of statistics and programme implementation. For the month of May 2016, among all items that constitute the index, the price of pulses rose the fastest. The price of pulses(dal) rose by 31.6% between May 2015 and May 2016. This after rising by 16.6% between May 2014 and May 2015.

Hence, over a two-year period the price of pulses has risen by around 53.4%. This is as per the consumer price index, the rise in price at the actual retail level might be more. The only other items that saw double digit inflation, over the last one year, were vegetables and sugar.

Of course, this rise in price must have upset the monthly budget of many homemakers. Nevertheless, the rise in price of pulses is not something new. It is now a part of our lives. The question is why is this happening?

In the budget speech made in February, earlier this year, the finance minister Arun Jaitley had said that: “Monitoring of prices of essential commodities is a key element of good governance. A number of measures have been taken to deal with the problem of abrupt increase in prices of pulses.
has approved creation of buffer stock of pulses through procurement at Minimum Support Price and at market price through Price Stabilisation Fund
.”

On the face of it, this sounds a sensible thing to do. Up until February, the government maintained buffer stocks for rice and wheat. The idea was that it could do the same for pulses as well. If prices went up, some of the buffer stock could be released in the market and prices be stabilised.

The trouble is what works with rice and wheat doesn’t necessarily work with pulses. With an assured procurement of rice and wheat by the government, India produces much more rice and wheat than it needs. As the Economic Survey of 2015-2016 points out: “It is increasingly clear that there is over-production of cereals, especially in some states. Reducing this over-production—a manifestation of this exit problem—is difficult.”

What is the trouble with the government procuring pulses as well? The dietary patterns as they evolve seem to favour increased protein and pulses are a major source of protein, in a country, where a significant portion of the population is vegetarian.

The trouble is that the production of pulses hasn’t been going up. In 2013-2014, the total production of pulses stood at 19.25 million tonnes. In 2014-2015, this fell to 17.15 million tonnes. The target though was at 20.05 million tonnes. The expected production in 2015-2016(as per the third advanced estimate) has fallen even further at 17.05 million tonnes.

The failed monsoon over the last two years is the obvious explanation for this. Also, what does not help is that a major portion of pulses are produced in unirrigated areas unlike rice and wheat. As the Economic Survey points out: “The production pattern for pulses is very different from other crops. Not only is most of the land dedicated to growing pulses in each state unirrigated, but the national output of pulses comes predominantly from un-irrigated land. In contrast, a large share of output in wheat, rice and sugarcane – in Punjab, Haryana and UP – is from irrigated land.”

Hence, for a pulses production to increase a good monsoon is necessary. In this scenario of falling production of pulses, the government decision to build a buffer stock hasn’t really helped. In early March 2016, the ministry of agriculture told the Rajya Sabha that the government has decided to build a buffer stock of pulses amounting to 0.15 million tonnes. One third of the amount had already been procured.

This meant that the overall supply of pulses to the open market fell further, driving up prices. Given the huge gap between demand and supply, even a small fall in supply, can drive up prices.

The following table shows the total amount of pulses that have been imported over the years.

Chart 4.6: India’s Imports of Pulses, 2004-05 to 2014-15India's Imports of Pulses, 2004-05 to 2014-15In 2014-2015, the total amount of pulses imported stood at 4.57 million tonnes. As can be seen from the table, the total amount pulses imported has gone up dramatically over the years. Between April 2015 and February 2016, the country imported 5.56 million tonnes of pulses. (Source: Commodity Profile of Pulses, May 2016).

Myanmar remains a major source for import of pulses. But despite the imports, the prices of pulses continued to rise. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2016-2017 points out: “India being the largest producer, consumer and importer of pulses in the world, its domestic demand-supply volatility has high impact on international trade.

This means that Indian demand drives up prices in international markets. So, even if we are able to import pulses to meet demand, the prices continue to remain high. As the Economic Survey points out: “Given that India is the major producer and consumer of pulses, imports cannot be the main source for meeting domestic demand. Therefore, policy must incentivise movement of resources towards production of pulses.”

One reason why farmers do not like to grow pulses despite such high prices is that unlike rice, wheat and sugarcane, there are no steady buyers. This means that farmers have to sell their produce in private markets where they can get a price even lower than the MSP. And given this, lack of predictability about a price, farmers prefer to grow rice and wheat.

In an ideal world, the way out of this would be develop a proper agricultural market where market forces would do their work. But in India, what is likely to happen is that the government will procure more and more pulses, like rice and wheat, in the years to come.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2016-2017 points out: “The long-term measures include increasing productivity, bringing more area under pulses cultivation by diversifying from paddy and wheat alongside providing adequate facilities for assured procurement, creating buffer stock of pulses and their distribution through Public Distribution System (PDS).”

This is a bit of a chicken and egg story. As the government procures more pulses, the supply in the open market will fall, pushing up prices, until the government releases pulses into the open market. This is how things will operate, with spurts in prices of pulses, until enough farmers know about the fact that the government is procuring pulses as well, along with rice and wheat. This knowledge will then lead to more farmers cropping pulses and a gradual increase in production, in the years to come.

Also, the yields of pulses in India is very low in comparison to other countries. As the Economic Survey points out: “India has low yields comparable to most countries. On an average, countries like Brazil, Nigeria, and Myanmar have higher yields. Some states do much better than the all-India average, but even the key pulse producing state of Madhya Pradesh has yields (938 kg/ha) barely three-fifths that of China’s (1550 kg/ha).”

Price stabilisation of pulses also requires an improvement in the yields.

The column originally appeared in Vivek Kaul’s Diary on June 24, 2016