Category: The Daily Reckoning | Page 4

7 December, 2015

Corporate performance shows a clear trend of demand destruction

Last week the Reserve Bank of India (RBI) released the data on the performance of non-financial private corporate business sector during the second quarter of 2015-16 (July- September 2015). This data makes for a very interesting reading.

The data aggregates the financial results of 2,711 listed nongovernment non-financial companies during the period July to September 2015. Take a look at the following table which summarises the performance of the companies. Also, please keep in mind that “to compute the growth rates in any quarter, a common set of companies for the current and previous period is considered.” This has had to be done because the number of companies across quarters does not match. So while 2863 companies have been taken into account for July to September 2014 results. Only 2,711 companies have been considered for the period July to September 2015.

Indicator	July to September 2014		April to June 2015		July to September 2015
Indicator	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent
No. of Companies	2,863		2,723		2,711
Sales	8,107	4.2	7,639	-2.4	7,517	-4.6
Value of Production	8,148	4.2	7,694	-2.4	7,479	-5.6
Expenditure, of which	7,076	3.6	6,534	-3.5	6,330	-7.8
Raw Material	3,760	3.4	3,199	-11.8	2,994	-18.7
Staff Cost	649	7.7	681	10.2	689	9.0
Power & fuel	297	3.7	284	-3.0	276	-4.2
Operating Profits (EBITDA)	1,073	8.3	1,160	3.7	1,149	8.9
Other Income	275	26.1	215	1.8	250	-5.8
Depreciation	297	3.5	304	3.6	301	4.0
Gross Profits (EBIT)	1,051	14.1	1,070	3.4	1,099	6.5
Interest	326	-0.6	342	9.5	333	8.4
EBT (before NOP)	725	22.1	729	0.7	766	5.6
Tax Provision	204	29.0	211	6.0	219	9.6
Net Profits	537	25.6	514	-9.5	577	9.9

The table clearly shows that the sales of the companies during the period July to September 2015 fell by 4.6%, in comparison to the same period last year. Despite falling sales the net profits went up by 9.9%. There are a couple of important points that need to be made here.

Falling sales show that businesses lack pricing power. This is because the consumer as well as industrial demand for products hasn’t been going up at the same pace as it was in the past. Nevertheless, despite falling sales, the net profit went up by close to 10%. What is happening here? The raw material costs of businesses fell by 18.7% during the three month period in comparison to a year earlier.

As CARE Ratings pointed out in a recent research note: “The negative growth in net sales is largely attributed to weakness in demand and pricing power. Despite negative producer’s inflation as measured by the wholesale price index signalling also lower raw material costs, growth in profits do not appear to be satisfactory.”

The raw material cost during the period stood at a total of Rs 2,99,400 crore. This was Rs 76,600 crore lower. Profit on the other hand jumped by around Rs 3,900 crore during the quarter. Hence, the entire jump in profits has come from lower raw material costs.

Raw material costs have fallen largely due to falling global commodity prices. Power and fuel costs have also eased by Rs 2,100 crore. This has helped businesses bring down total expenditure by Rs 74,500 crore during the quarter and in turn, help report greater profits.

Now let’s dig a little deeper and look at how manufacturing and services companies have done.

Indicator	Manufacturing
	July to September 2014		April to June 2015		July to September 2015
	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent
No. of companies	1,910		1,828		1,828
Sales	5,896	3.9	5,414	-4.8	5,275	-7.8
Expenditure, of which	5,270	3.5	4,732	-6.2	4,534	-11.3
Raw Material	3,374	3.0	2,882	-13.0	2,697	-19.1
Staff Cost	293	11.3	311	10.8	309	9.4
Power & fuel	168	10.5	164	2.8	158	-2.5
Operating Profits (EBITDA)	649	7.9	717	4.0	699	11.0
Other Income	127	20.1	119	-3.9	140	12.5
Depreciation	184	3.0	187	4.1	181	2.4
Gross Profits (EBIT)	592	12.0	649	2.4	658	13.9
Interest	188	3.2	196	9.4	182	4.2
EBT (before NOP)	404	16.7	453	-0.4	476	18.1
Tax Provision	131	30.1	135	6.9	137	6.2
Net Profits	281	21.6	310	-14.3	333	19.8

The manufacturing sector includes companies operating in Iron & Steel, Cement & Cement products, Machinery & Machine Tools, Motor Vehicles, Rubber, Paper, Food products etc. The sales of these companies have fallen by 7.8% during the three month period between July and September 2015. This shows a slowdown in industrial as well as consumer demand.

The profits on the other hand, tell a completely different story jumping by 19.8%. This was primarily on account of raw material costs falling by 19.1%, during the period. It needs to be mentioned here that for profits to continue to grow raw material costs will have to continue to fall, so that expenditure can be controlled or brought down.

For raw material prices to continue to fall, commodity prices need to continue to fall. Commodity prices have already fallen quite a lot. Hence, for profits to grow in the next financial year sales of companies need to start growing as well.

Let’s take a look at the performance of services sector which includes companies operating in Real Estate, Wholesale & Retail Trade, Hotel & Restaurants, Transport, Storage and Communication industries.

Indicator	Services
	July to September 2014		April to June 2015		July to September 2015
	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent	Amount in Rs billion	Year on year growth in Per cent
No. of companies	465		454		450
Sales	701	8.8	816	6.8	799	7.2
Expenditure, of which	583	6.4	655	4.8	646	3.3
Raw Material	49	12.9	47	6.8	44	-13.6
Staff Cost	50	11.9	55	8.0	56	8.4
Power & fuel	40	3.4	31	-21.7	30	-25.9
Operating Profits (EBITDA)	129	28.3	164	16.4	157	19.4
Other Income	64	61.7	24	2.9	43	-33.3
Depreciation	60	6.4	68	6.6	69	11.2
Gross Profits (EBIT)	133	59.0	120	19.5	131	-2.2
Interest	45	-8.0	50	6.0	56	20.8
EBT (before NOP)	88	@*	70	31.5	75	-14.3
Tax Provision	17	-9.3	23	16.7	23	35.4
Net Profits	71	@*	48	6.6	47	-33.9

* The ratio / growth rate for which denominator is negative or negligible
is not calculated, and is indicated as ‘$’ and ‘@’ respectively.

The sales of companies operating in the services sector have risen by around 7.2% but net profit has fallen by 33.9%. This despite the fact that raw material cost as well as cost of power and fuel has crashed. Nevertheless, this did not prevent overall expenditure from going up. This again shows that companies operating in this sector are going through tough times and lack pricing power. The consumption has still not picked up despite the RBI cutting the repo rate by close to 125 basis points since the beginning of this year.

The column originally appeared on The Daily Reckoning on December 7, 2015

4 December, 2015

Rajan won’t cut interest rates before the budget

This is a column I should have written earlier this week. But given that I got busy explaining the 7.4% economic growth number, this took a backseat.

The Reserve Bank of India (RBI) presented the Fifth Monetary Policy Statement for this financial year, earlier this week on December 1, 2015. It maintained the repo rate at 6.75%. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

In the press conference that followed the declaration of the Monetary Policy Statement, Raghuram Rajan, the governor of the RBI, said: “We are still accommodative.” What this means in simple English is that the RBI is still looking to cut the repo rate rather than raise it, if the conditions are right.

Nevertheless, it is unlikely that Rajan and the RBI will cut the repo rate any further before Arun Jaitley presents the next budget in February 2016. Why do I say that? Almost towards the end of the Monetary Policy Statement Rajan says: “The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path.”

The Seventh Pay Commission has recommended a 23.6% overall increase in the salaries of central government employees as well as the pensions of the retired central government employees. The RBI will keep a lookout for the impact this jump in salary and pension will have on inflation in the days to come.

Over and above this, the RBI feels that the impact of the Seventh Pay Commission recommendations on inflation (or what it calls direct effect on aggregate demand) will be offset by the government cutting down on its expenditure in other areas. The fear is that the increased salaries and pensions will lead to higher spending and that will lead to higher inflation.

There are multiple reasons why this is unlikely to happen. The first being that factories are currently running around 30% below capacity. Typically as demand for products and services goes up, the supply side can’t keep pace if it is operating full throttle. That is clearly not the case here. If consumer demand picks up, the supply side can easily accommodate by ramping up production.

Further, the RBI feels that the government will carry out “appropriate budgetary tightening”
to stay on “the fiscal consolidation path”. The Seventh Pay Commission recommendations as and when they are accepted, will lead to a higher expenditure for the government, everything else remaining the same.

The RBI expects that the government will not let this happen by ensuring that it cuts its expenditure on other fronts and ensures that it keeps moving towards the fiscal deficit target of 3% of the gross domestic product for 2017-2018 that it has set for itself (or what the RBI calls the fiscal consolidation path in the monetary policy statement).

While expectation is one thing, the RBI needs to make sure that the government continues moving towards the fiscal consolidation path. And that will only be possible to figure out once the budget for the next financial year 2016-2017 is presented in February 2016.

Given this, the RBI is unlikely to do anything on the interest rate front before it gets a dekko at the next financial year’s budget document.

Another important point that the RBI made in the monetary policy statement was regarding the efficacy of monetary policy. As it pointed out: “Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points.” One basis point is one hundredth of a percentage.

What this means is that while the RBI has cut the repo rate by 125 basis points since the beginning of 2015. The banks in turn have managed to cut less than half at 60 basis points. Why is that? A major reason for this is that bad loans have been piling up at banks. The overall bad loans of banks as of September 2015 stood at Rs 3,36,685 crore. As a recent research note by CARE Ratings points out: “Gross NPAs [i.e. bad loans] stood at Rs 3,36,685 crore in Q2-FY16[as on September 30, 2015] increasing by Rs 71,129 crore over Q2-FY15[as on September 30, 2014]. This indicates growth of 26.8% in gross NPAs across 37 banks.”

The public sector banks are facing more bad loan problems than their private sector counterparts. Bad loans eat into profit. Hence, in order to maintain their profit at a certain level, the public sector banks need to maintain their interest rates at high levels. And they have not been able to cut interest rates by as much as the RBI has cut the repo rate.

Further, given that the public sector banks haven’t cut interest rates by as much as the RBI wants them to, the private sector banks haven’t needed to cut interest rates either at a rapid rate.

Given this, unless the bad loans problem of public sector banks is solved, interest rates are unlikely to keep coming down at the rate the RBI wants them to. As the RBI acknowledged: “The on-going clean-up of bank balance sheets will help create room for fresh lending.”

The other issue here is that of small savings schemes which tend to offer slightly higher interest rates than bank fixed deposits. Given this, unless the interest rates on small savings schemes come down to the level of fixed deposits, banks can’t rapidly cut the interest rates on their fixed deposits. If they do this, they are likely to see money deposited with them moving to small savings schemes.

If banks can’t cut their fixed deposit rates, they won’t be able to cut their lending rates. The RBI was hopeful that “The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.”

The column originally appeared on The Daily Reckoning on December 4, 2015

3 December, 2015

What the media did not tell you about the economic growth number

In yesterday’s column I had explained why the gross domestic product (GDP) growth number of 7.4% is more of a statistical quirk. The GDP is essentially the measure of the size of an economy.

The coverage of the GDP news in the media talked about the 7.4% economic growth, without really getting into the details of how that number was arrived at. The GDP growth of 7.4% that everyone from the politicians to the media seem to be talking about is essentially the real GDP growth.

Neither the media nor the economists and the politicians talked about the nominal GDP, which came in at 6%. The nominal GDP is calculated at the current price levels. Once this is adjusted for the prevailing inflation, we arrive at the real GDP.

Hence, nominal GDP growth minus inflation equals the real GDP growth. In this case, the nominal GDP growth came in at 6% and was lower than the real GDP growth of 7.4%. This meant that the inflation was negative. The inflation in this case is referred to as GDP deflator and came in at – 1.4%.

This as I had explained yesterday is because the GDP deflator is a sort of a combination of inflation as measured by the consumer price index and inflation as measured by the wholesale price index. The wholesale price index has been in negative territory for some time now. And this has led the GDP deflator into negative territory as well. Hence, the deflator instead of deflating the nominal GDP number is inflating it.

This is a point that the experts and the media missed out on. There was another important point that the media missed out on and was brought to my notice by Anindya Banerjee, Analyst, Kotak Securities, FX and interest rate desk.

Nominal GDP Growth

Earlier this year, the ministry of statistics and programme implementation moved to a new way of measuring the gross domestic product. They also produced some backdated data for the last few years. The red curve shows the nominal GDP growth rate as per the new method of calculating the GDP. The blue curve, on the other hand, shows the GDP growth as per the old method of calculating the GDP.

What the table clearly tells us is that the nominal GDP growth has collapsed. In fact, as the table clearly shows the nominal GDP growth has never been as low as it is now, in the last ten years. I know I am committing a sin here by mixing data from two different GDP series but the trend has been clearly downward. And this is a reason to worry.

As I had mentioned in yesterday’s column, negative wholesale price inflation has had a huge role to play in inflating the economic growth number. India is seeing a negative wholesale price inflation because of several reasons. Commodity prices have crashed and that is the good bit, because we import a huge amount of important commodities like oil.

On the flip side, negative wholesale price inflation is also a reflection of weak industrial and consumer demand, low capacity utilisation by factories as well as low private investment and falling exports.

These factors are a negative for the economy. But they have ended up adding to the calculation of the GDP in a positive way. The negative wholesale price inflation has led to a negative GDP deflator which has in turn inflated the real GDP growth number. And this has meant that even though the real GDP growth number is strong, the economic growth doesn’t really seem strong.

What all this tells us is that for economic growth to really recover, the nominal GDP number needs to start to move up. Also, it is worth highlighting here that nominal growth really matters.

Corporate earnings are not adjusted for inflation through the GDP deflator. Neither are wages given by companies both private and government, as well as entrepreneurs. And this has an impact on the psychology of private consumption. The corporate earnings for the period of three months between July and September 2015 grew by less than 1%. In this scenario wage increments will be low.

Let’s say the companies are generous and give around 3% wage increments to their employees in the coming year. The employee will look at it as a 3% increment in wages, which is not huge. He will not look at it as a 7.5% ‘real’ increase in wages (3% nominal wages minus the wholesale price inflation of around – 4.5%). This tendency to look at money in nominal rather than real terms is referred to as the money illusion. Given this, higher wages will not lead to a higher consumption.

The government revenue and the fiscal deficit are not adjusted for inflation either. Also, the fiscal deficit of the government is expressed as a percentage of nominal GDP and not real GDP. Fiscal deficit is the difference between what a government earns and what it spends. Let’s take a closer look at the fiscal deficit number projected by the government for the current financial year, 2015-2016. The fiscal deficit has been projected at Rs 5,55,649 crore or 3.9% of the GDP.

The GDP has been assumed to be at Rs 14,108,945 crore for 2015-2016. The GDP under consideration is nominal GDP. The nominal GDP number for 2015-2016 was arrived at by assuming a growth of 11.5% over the nominal GDP number for 2014-2015.

The nominal GDP growth number between April and June 2015 had stood at 8.8%. Between July and September 2015 it came in at 6%. Hence, for the six months of this financial year, the nominal GDP growth has been nowhere near the assumed 11.5%.

Let’s assume that the nominal GDP growth improves during the second half of the year, and the final nominal GDP growth number comes in at 9%. What happens to the fiscal deficit? Assuming the absolute fiscal deficit stays the same, the fiscal deficit as a proportion of the GDP will cross 4%, against the targeted 3.9%. In order to ensure that this does not happen, the government will have to cut down on its expenditure. In an economy where private expenditure and investment is slow that is not the best thing that can happen.

Further, the government wants to reduce the fiscal deficit to 3% of the GDP by 2017-2018. For that to happen, the nominal GDP has to start to go up at a higher rate. It also needs to be pointed out here that the Raghuram Rajan, the governor of the Reserve Bank of India, in the latest monetary policy statement said that he expects the government to continue maintaining the fiscal deficit in the years to come, despite the increased expenditure due to the implantation of the recommendations of the Seventh Pay Commission.

The column was originally published on December 3, 2015 on The Daily Reckoning

2 December, 2015

The economic growth of 7.4% needs to be taken with a pinch of salt

The ministry of statistics and programme implementation published the gross domestic product (GDP) data for India for the period July and September 2015, a couple of days back. The GDP, a measure of the size of the economy, grew by 7.4% during the period in comparison to the same period in 2014.

If we just look at this number then we have to conclude that the Indian economy is doing fabulously well. But other economic data clearly suggests otherwise.

The exports have been going down for the last 11 months.

The corporate earnings for the three months ending September 2015 saw a growth of less than 1%.

The real estate sector is down in the dumps.

The loan growth of banks has been in single digits for some time now.

The bad loans of banks continue to grow.

Two wheeler and tractor sales, a reflection of rural demand, fell during the first six months of the year.

The vehicle sales, a good reflection of urban demand, grew at a very low rate during the first six months of the year.

The number of stalled industrial projects continue to grow.

The factories are running 30% below capacity.

And India has seen two deficient monsoons in a row.

So how is the economy still growing at 7.4%? The answer might very well lie in the way the GDP growth is calculated. The 7.4% economic growth that we are talking about here and which the economists, politicians and regulators also talk about, is essentially the real GDP growth. The real GDP growth is obtained by subtracting inflation from nominal GDP growth.

For example, if the nominal GDP growth is 11% and the inflation is 4%, then the real GDP growth is 7%, to put it in a very simple way. This is essentially done to ensure that the GDP numbers across different periods of time are comparable, by removing the inflation component from the growth numbers.

The inflation number used in this case is referred to as the GDP deflator and it deflates the nominal GDP growth to the real GDP growth. As the Chief Economic Adviser Arvind Subramanian said in a recent interview to a television channel: “They actually only measure the wholesale and consumer prices, the GDP deflator is just constructed.” The GDP deflator typically falls between the inflation measured by the wholesale price index and inflation as measured by the consumer price index. Also, given that it is a combination of both the consumer price index and the wholesale price index, it is the most broad based measure of inflation.

During the period July to September 2015, the nominal growth came in at 6%. The GDP deflator on the other hand was at − 1.4%. This was primarily because inflation as measured by the wholesale price index number has been in negative territory for a while now. For the months of July, August and September, it stood at −4.05%, −4.95% and −4.54%, respectively.

The consumer price inflation on the other hand stood at 3.78%, 3.66% and 4.41%, respectively. Given that, the GDP deflator falls somewhere in between the inflation as measured by the consumer price index and the inflation as measured by the wholesale price index, it was at −1.4%.

Real GDP as explained earlier is obtained by subtraction the GDP deflator from the nominal GDP. And this led to a real GDP growth of 7.4% (6% − (−1.4%). Given that the GDP deflator was in negative territory, instead of deflating the nominal GDP number, it has ended up inflating it. And this explains how an economic growth rate of 7.4% has been arrived at.

The question that crops up here is why has inflation as measured by the wholesale price index been in the negative territory? One reason for this has been a fall in commodity prices, which has benefited the Indian economy. India is a huge importer of commodities like oil. On the flip side, a fall in exports, stagnant consumer and industrial demand, low private investment, etc., are also reasons of falling inflation as measured by the wholesale price index.

Over and above this, the Reserve Bank of India governor, Raghuram Rajan recently talked about the capacity utilisation of the factories being at 70%. This has been falling from levels of over 75% in January to March 2013. This suggests a significant slack in the economy. And it means that businesses really do not have pricing power. This is reflected in the more or less flat corporate earnings.

All these reasons have led to a negative inflation number as measured by the wholesale price index. This negative number has led to a negative GDP deflator and that in turn has led to an inflated real GDP number.

In simple English many economic factors which are negative for the economy have ultimately ended up becoming positive for the real GDP number. That’s the long and short of it and perhaps explains why the economy is “supposedly” growing by 7.4%, even though all real economic indicators suggests otherwise.

Further, economists Pranjul Bhandari and Prithviraj Srinivas economists at HSBC Securities and Capital Markets India, have raised some doubt regarding the reliability of the GDP deflator. As they write in a research note: “Nominal GDP…grew at a much slower clip than real GDP…implying that deflators have fallen sharply into the negative territory. Parsing through details throws up more questions than answers. We find that growth in services deflator, which is infamous for high and sticky prices, was actually running below the industry deflator. This is odd because manufacturing and industry at large should be the prime beneficiaries of falling commodity prices and as such should run below services (which is largely non-tradable) inflation.”

What they mean here is that the inflation in services was higher than inflation in manufacturing. This seems odd given that manufacturing should have benefited more because of falling commodity prices.

Due to this anomaly the HSBC economists suggest that the “real growth is lower than the headline reading suggests.”

The column originally appeared on The Daily Reckoning on Dec 2, 2015

1 December, 2015

Why high dal prices are not enough to increase production

In response to yesterday’s column a reader on the social media concluded that it is obvious that farmers should grow tur dal which is priced at Rs 200 per kg, in comparison to sugar which is selling at a much lower price. He further said that businesses which tend to enjoy pricing power tend to do well.

Only if it were as simple as that. This is the classic, interest rate cut will lead to increased consumption, kind of economic theory—it doesn’t always work. In fact, in order to encourage farmers to plant more dal (pulses) the government in early November announced a significant increase in the minimum support price of gram and masur dal.

The minimum support price of gram was increased by Rs 250 to Rs 3425 per quintal (i.e. 100 kgs). The minimum support price of masur was increased by Rs 250 to Rs 3325 per quintal. Over and above this, a bonus of Rs 75 per quintal has also been announced.

Does this increase in minimum support price and a bonus to top it, mean that farmers will now automatically plant more dal in the rabi season, which is currently on. The government clearly thinks so. As the press release announcing the increase in minimum support prices (MSPs) pointed out: “The higher MSPs would increase investment and production through assured remunerative prices to farmers.”

In a world of lower interest rates leading to increased consumption kind of economics, this would have made perfect sense. The trouble is do farmers know about the government offering a minimum support price on dal? The Commission for Agricultural Costs and Prices (CACP), a part of the ministry of agriculture, suggests otherwise.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “Two most important procurement agencies of the Government of India namely Food Corporation of India (FCI) and National Agricultural Cooperative Marketing Federation of India Limited (Nafed) were set up with the main objectives of procuring notified commodities at MSP, if and when the market prices go below MSP. These agencies have been in the existence for over 50 years and 30 years respectively. Yet, the benefits of MSP bypass a large section of farmers, rendering the pricing policy and procurement operations ineffective. As per Situation Assessment Survey (NSS 70th Round), only 2.57 million households were benefitted directly from procurement of paddy during 2012. The procurement of oilseeds and pulses is far worse.”

So the question is do the farmers know about these price signals being sent out by the government? And the answer is no. In fact, as can be seen from the accompanying table in 2014-2015, the Nafed barely picked up any tur, moong or urad dal.

Table: Procurement of Pulses by Nafed.

Nafed picked up 1543 tonnes of tur dal in 2014-2015. The total production of tur dal in 2014-2015 was around 2.78 million tonnes. The total production in 2013-2014 had stood at 3.34 million tonnes. What this tells us is that unlike rice and wheat, the government agencies are picking up very little of dal directly from the farmers at the minimum support price.

The fact that the government picks up rice and wheat and does not pick up dal has distorted the entire production process of dal. What does not help is that the average farmer has faced losses.

As a recent news-report in The Economic Times points out: “According to an analysis done by the scientists of the Mahatma Phule Krishi Vidyapeeth (Agricultural University), Rahuri, farmers who grew tur in 2014, suffered losses of 12.7 per cent.”

The news-report then goes on to suggest that most farmers had to sell the tur dal they had produced at below MSP in 2013 and 2012. And this explains why the production of tur dal fell from 3.34 million tonnes in 2013-2014 to 2.78 million tonnes in 2014-2015. What this also tells us is that high prices are not leading to increased gains for farmers, and it is the middle men who are gaining the most.

Imports are not a solution because the global market for dal is very thin. As the report titled Price Policy for Rabi Crops—The Marketing Season of 2016-2017 points out: “As per Food and Agricultural Organization (FAO), the total global production of pulses was 72.3 million tonnes in 2013, out of which about 19% is traded. India is the largest producer of pulses in the world with a share of 24.3 percent…India is the largest importer with a share of 27.3%.”

In fact, India’s import of pulses has gone up dramatically from 13.4 lakh tonnes in 2004-2005 to around 45.7 lakh tonnes in 2014-2015. Further any more jumps in imports will only lead to an increase in prices of dal. So what is the way out?

The farmers first and foremost need to be aware that there is something known as a minimum support price. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “This calls for giving wide publicity about MSP and procurement agencies on radios, television and vernacular languages in popular local dailies, at least 15 days before the start of procurement operations so as to reach farmers far and wide.”

Second, given that state agencies are procuring rice and wheat, they need to procure dal as well, in order to balance things out. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “A pertinent question arises as to why farmers are not wholeheartedly diversifying towards oilseeds and pulses. Based on CACP’s interaction with a wide spectrum of farmers and also based on field visits, it emerged that farmers need a backup plan in the form of reasonably strong procurement machinery to be put in place to fall back upon when the prices fall below minimum support price.”

As the press release announcing an increase in the minimum support price of Rabi crops pointed out: “The Cabinet also directed that in order to strengthen the procurement mechanism for pulses and oilseeds, Food Corporation of India (FCI) will be the Central Nodal Agency for procurement of pulses and oilseeds.”

Let’s see how much impact this move has. In an ideal world, the market should do its own thing, but in this case government intervention seems to be the best way out, at least in the short-term.

(The column originally appeared on The Daily Reckoning on Dec 1, 2015)