Pulse of the matter

Toor_Dal_Tur_dal

 

The Economic Survey of 2015-2016 is a lovely document which goes into great detail on what is wrong with India on the economic front and offers good workable solutions to solve these problems.

One of the points that the Survey makes is regarding the Indian agriculture becoming cereal centric. The reason for this lies in the fact that the government procures rice and wheat from the farmers at the minimum support price(MSP). While the government announces an MSP for 23 crops, it largely buys only rice, wheat and some cotton. For sugarcane there is an MSP like engagement where the government fixes prices and the sugar mills are legally obligated to buy sugarcane from the farmers at that price.

As the Survey points out: “In principle MSP exists for most farmers for most crops, it’s realistic impact is quite limited for most farmers in the country. Public procurement at MSP has disproportionately focused on wheat, rice and sugarcane and perhaps even at the expense of other crops such as pulses and oilseeds.”

This has effectively led to a situation where the government has large stocks of rice and wheat much above the buffer stock norms. But it also leads to a situation where there are frequent spikes in the price of pulses. In the recent past the price of tur dal (or pigeon pea) had touched Rs 200 per kg. Elections have been lost in the past on onion prices going up and given this, elections can easily be lost in the future with price of pulses going up.

Importing pulses is really not a solution because India is the number one producer as well a consumer of pulses in the world. As the Survey puts it: “Given that India is the major producer and consumer of pulses, imports cannot be the main source for meeting domestic demand.”

This means that the farmers need to be incentivised to produce pulses and at the same the yields on pulses also need to go up. The question is how can the government incentivise farmers to produce pulses and wean them away from producing rice and wheat.

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 Commission for Agricultural Costs and Prices’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.”

Along these lines, the Economic Survey recommends a “strengthened procurement system” for pulses. And the good part is that the finance minister Arun Jaitley has gone ahead with this suggestion in the budget.

As Jaitley said in his budget speech: “Effective arrangements have been made for pulses procurement… Incentives are being given for enhancement of pulses production. Rs 500 crores under National Food Security Mission has been assigned to pulses.”

Also, the government has plans of creating a buffer stock for pulses like it has for rice and wheat. As Jaitley said during his speech: “A number of measures have been taken to deal with the problem of abrupt increase in prices of pulses. Government has approved creation of buffer stock of pulses through procurement at Minimum Support Price and at market price through Price Stabilisation Fund. This Fund has been provided with a corpus of  Rs 900 crore to support market interventions.”

Given the current structure of the agricultural economy these are steps in the right direction. With the government buying more pulses at the minimum support price, it will incentivise more farmers to grow them, improving the total production of pulses. This is very important given that pulses are a huge source of protein for vegetarians.

The other big problem with pulses is that most of it is grown on unirrigated land. As the Economic Survey points out: “In contrast, a large share of output in wheat, rice and sugarcane – in Punjab, Haryana and UP – is from irrigated land. In water scarce Maharashtra, all sugarcane is grown on irrigated land.

Meeting the high and growing demand for pulses in the country will require large increases in pulses production on irrigated land, but this will not occur if agriculture policies continue to focus largely on cereals and sugarcane.” A better procurement policy for pulses will help in increasing production.

Further, pulses have a low yield. In fact, the yield in India is lower than other key pulse producing countries like Brazil, Myanmar and Nigeria, which have better yields than that in India. Madhya Pradesh which is the main state producing pulses, has a yield of 938 kg per hectare. In comparison, China has yield of 1550 kg per hectare.

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 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%.”

In order to improve yields, either more pulses need to be grown under irrigated areas, or the unirrigated areas need access to irrigation. The second option will take a lot of time to achieve. Given this, it is important that farming of pulses is encouraged in areas which have access to irrigation. And that is precisely what Jaitley has tried to do with this budget.

There may be lot that is wrong with Jaitley’s budget, but he has got it right when it comes to pulses.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in The Asian Age and Deccan Chronicle on March 2, 2016

Why the Modi bull market is likely to continue

narendra_modiVivek Kaul  
If foreign investors into the Indian stock market are to be believed, India is currently in the midst of a Modi rally. Goldman Sachs had explained this phenomenon best in a note titled Modi-fying our view, published on November 5, 2013. “The BJP led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014. Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi (the current chief minister of Gujarat) as an agent of change. Current polls show Mr.Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year. Even though the actual general election outcome is uncertain, the market could trade this favorably over the next 2 quarters, which argues for modifying our stance,” the Goldman Sachs note pointed out.
Every bull market has a theory behind it. But ultimately any market goes up when the amount of money being brought in by the buyers is more than the amount of money being taken out by the sellers. For the Indian stock market to continue going up, and for the so called “Modi” rally to continue, the foreign investors need to continue bringing in money into the country.
The foreign institutional investors have made a net investment of Rs 72,791 crore since the beginning of the year. During the same period the domestic institutional investors have net sold Rs 65,694 crore.
In fact, numbers for the month of November make for a very interesting read. The foreign institutional investors during the month have made a net investment of Rs 6108 crore. During the same period the domestic institutional investors have net sold stocks worth Rs 9376 crore.
Through this data we can conclude that foreign investors have been more bullish on Indian stocks than Indian investors. Why has that been the case?
A possible interpretation of this is that the domestic institutional investors are worried about the overall state of the Indian economy. The Goldman Sachs summarises these challenges well as “the macro challenges that India faces in terms of external and fiscal imbalances, high inflation and tight monetary policy.” And given this, they have been net sellers during the course of this year.
The foreign investors are not bothered about the state of the Indian economy and that is why they have been buying Indian stocks. Why is that? A possible explanation is the fact that they have access to all the “easy money” in the world at very low interest rates.
They have been borrowing and investing this money in the Indian as well as other stock markets all over the world. This has been possible because of all the money being printed by the Western central banks. This has led to a situation where there is enough money floating around in the financial system and hence, kept interest rates low.
So for the foreign investors to continue investing money in India, it is important that interest rates in the Western world continue to remain low. For that to happen the Western central banks need to continue printing money. And that is the most important condition for the so called “Modi” rally to continue.
In case of the United States, which has been printing $85 billion every month, the decision to continue the easy money policy rests primarily in the hands of Janet Yellen, who is currently the Vice Chair of the Federal Reserve of United States, the American central bank, and will take over as its next chairperson early next year.
So will she continue printing money? Jeremy Grantham, the chief investment strategist of GMO, and one of the most acclaimed hedge fund managers in the world, believes that Yellen will continue to print money, and follow her predecessors Ben Bernane and Alan Greenspan, and ensure that the Federal Reserve continues to run an easy money policy in the process.
As Grantham puts it in 
Ignoble Prizes and Appointmentshis most recent quarterly newsletter “My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up.”
And this will mean stock market rallies not only in the United States but all over the world, including in emerging markets like India. “My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up,” writes Grantham.
What is interesting is that another veteran of the US markets and one of its foremost investment newsletter writers Richard Russel has had something similar to say in the recent past. Russel in a recent note titled 
Get Ready for the Mania Phase explained that there are three phases to any bull market. In the first phase the wise and seasoned investors enter the market and pick up stocks which are going dirt cheap, because of the previous bear market.
In the second phase, which happens to be the longest and the most deceptive phase, retail investors flirt with stocks and buy them very carefully and not on a regular basis. In the third and final phase of the bull market investors really take to stocks. As Russel writes “The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed.”
This third and final phase of the bull market has started in the United States, feels Russel. “This is where I think we are now in this bull market. I believe that during the next 12 months we will experience a surprising and ever-expanding rush by the “mom and pop” public to enter the market. At the same time, veteran investors and institutions will seize the opportunity to distribute stock that they may have held for years,” he writes.
And this phenomenon along with the easy money policy of the Federal Reserve will lead to a global rally in stocks. As Russel puts it “All primary movements are international in scope, and this bull market will be no exception.”
The trouble of course is that this rally will not be based on any fundamentals, but just a lot of easy money chasing stocks. And that is something that cannot last beyond a while. The bubble will burst and there will be a lot of pain. As Grantham puts it “And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.”
The article originally appeared on www.firstpost.com on November 30, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)