## Retail Investors or Chickens Waiting to Get Slaughtered in the Stock Market?

Every year, for the last eight to ten days of the year, I try and take a reading holiday. In this time, I try and read a lot of crime fiction which I absolutely love, and non-fiction, which I would normally not read.

This year was no different. I took my regular reading holiday and ended up reading a fairly interesting set of books. All this set me thinking about the current state of the stock market in India. But before I get to that, let me describe what provided the cue for that.

One of the books I read was titled Police at the Station and They Don’t Look Friendly. This is an Irish crime fiction book written by Adrian McKinty. The lead character in this book is named Detective Sean Duffy, who somewhere in the book says: “I went out to the BMW and checked underneath it for bombs. No bombs but I’d always keep checking. As a student I’d listened to an aged Bertrand Russell’s thoughts on the fate of turkeys being fattened for Christmas, the turkeys subscribed to the philosophy of inductivist reasoning and didn’t see doomsday coming. I will.”

The book is set in the late 1980s, when the Irish Republican Army used to be a terror in Ireland. Hence, Inspector Duffy, was in the habit of checking for bombs, every time he drove his car. In the paragraph quoted above, Duffy also talks about the British mathematician and philosopher Bertrand Russell, turkeys and inductivist reasoning. What does he mean?

This is where things get interesting and need some elaboration. Another interesting book that I happened to read was Everything and More-A Compact History of Infinity by the American writer David Foster Wallace. The book is a fascinating history of the mathematical concept of infinity, which anyone without any background in Mathematics can also read and enjoy.

Among other things, Wallace in this book also discusses the principle of induction (the same as inductivist reasoning which Inspector Duffy talks about). As he writes: “The principle of induction states that if something x has happened in certain particular circumstances n times in the past, we are justified in believing that the same circumstances will produce x on the (n+1)th occasion.”

Wallace then goes on to say that the principle of induction is merely an abstraction from experience. He then goes on to give the example of Mr Chicken (you can replace it with Mr Turkey and come up with what Inspector Duffy was talking about). As Wallace writes: “There were four chickens in a wire coop of the garage, the brightest of whom was called Mr Chicken. Every morning, the farm’s hired man’s appearance in the coop area with a certain burlap sack caused Mr Chicken to get excited and start doing warmup-pecks at the ground, because he knew it was feeding time. It was always around the same time t every morning, and Mr Chicken had figured out, (man + sack) = food, and thus was confidently doing his warmup-pecks on that last Sunday morning when the hired man suddenly reached out and grabbed Mr Chicken and in one smooth motion wrung his neck and put him in the burlap sack and bore him off to the kitchen.”

So, what happened here? The chickens in the coop received food at a certain point of time every day. This led them to believe that the future will continue to be like the past and every day they will continue to receive food. Or to put it mathematically, just because something had happened n times, it will happen the (n+1)th time as well.

But what happened the (n+1)th time was that the chickens were killed to be cooked as food. As Wallace puts it: “The conclusion, abstract as it is, seems inescapable: what justifies our confidence in the Principle of Induction is that it has always worked so well in the past, at least up to now.”

This is a concept that Nassim Nicholas Taleb also explains his book Anti Fragile“A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So, with the butcher surprising it, the turkey will have a revision of belief-right when its confidence in the statement that the butcher loves turkeys is maximal … the key here is such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.”

As Taleb further writes: “We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that tends to prevail in intellectual circles.”

So, I guess by now, dear reader, the link between chickens (or turkeys for that matter) and the principle of mathematical induction must be very clear. But what is the link with the stock market investors? The Indian stock market investors since November 2016 have been like chickens and turkeys, where they have been well-fed in the form of good returns. And this has led them to assume that the good returns will continue in the time to come. At least, this is the feeling that I get after having spoken at a few investor conferences lately, and yes, the data suggests this as well. The logic as always is: “This time is different”. But is it?

Let’s look at some data which clearly shows that the stock market is clearly in a bubbly territory now. Figure 1 plots the price to earnings ratio of the Nifty 50, which is a reasonably good representation of the overall stock market, from January 1999 onwards.

Figure 1, clearly tells us that the price to earnings ratio of the stocks that constitute the Nifty index are at an extremely high level. The highest price to earnings ratio in the current rally was on December 26, 2017, when it touched 26.97. This means that investors are ready to pay Rs 26.97 for every rupee of profit that the Nifty companies make.

Figure 1:

At the beginning of the year, the price to earnings ratio of Nifty was around 22. From there it has touched nearly 27. This basically means that while the price of the stocks has gone up, the net profit that these companies make, hasn’t been able to rise at the same pace. The average price to earnings ratio since January 1999 has been 19.1. This also suggests that we are clearly in bubbly territory now.

There are 35 other instances of the price to earnings ratio being higher than the 26.97. All these instances were either between January and March 2000, when the dotcom bubble and the Ketan Parekh stock market scam were at their peak, or between December 2007 and January 2008, when the stock market peaked, before the financial crisis which finally led to many Wall Street financial institutions going more or less bust, broke out.

The highest price to earnings ratio of the Nifty was at 28.47 on February 11, 2000. As is clear from Figure 1, after achieving these peaks, the stock market fell dramatically in the days to come. As of March 31, 2017, the market capitalisation of Nifty stocks made up 62.9 per cent of the free float market capitalisation of the stocks listed on the National Stock Exchange. The point being that it is a good representation of the overall

market.

Lest, I get accused of looking at only the best stocks in the market, it is important to state here that price to earnings ratio of other indices is also at very high levels. Take a look Table 1.

Table 1:

Name of the indexPrice to Earnings Ratio as on January 1, 2018
Nifty 10028.1
Nifty 20030.32
Nifty 50032.36

Source: Ace EquityThe price to earnings ratio of the indices in Table 1 is at a five-year high. Table 1 tells us very clearly that the price to earnings ratios of the other indices, which are made up of small as well as midcap stocks, have gone up at a much faster rate than the Nifty 50.

This isn’t surprising. Every bull run sees the small and midcap stock rallying much faster than the large cap stocks which constitute the Nifty 50. And given this the fall as and when it happens, always leads to greater losses.

Investors, especially retail investors, continue to bet big on the stock market. Let’s look at Figure 2, which basically plots the total amount of money coming into equity mutual funds (i.e. net investment, which basically means the total amount of new money invested in equity mutual funds during a month minus the total amount of money that is redeemed by investors from these funds).

Figure 2:

Figure 2 basically plots the total net investment in equity mutual funds since December 2012. As is clear from Figure 2, as the stock prices have gone from strength and strength and their price to earnings ratios have gone up, the net investment in equity mutual funds month on month has gone up. In November 2017, Rs 1,95,080 million of net investment was made in Indian equity mutual funds.

This is an excellent example of retail money coming into the stock market, after they have rallied considerably. Will the stock market fall from here? History suggests that the Nifty 50 price to earnings ratio has never crossed a level of 28.47, and we are very close to that level. Having said that I do need to state something that the economist John Maynard Keynes once said: “Markets can remain irrational longer than you can remain solvent”. So, timing the market remains a tricky business.

Also, it is worth remembering here, that while the fund managers would like you to believe that this time it is different, it never really is. And when markets crash after such highs, they do so very quickly.

Let’s take a look at what happened in 2008. Take a look at Figure 3, which basically plots the closing level of Nifty 50, between November 2007 and December 2008.

Figure 3:

On January 8, 2008, the Nifty 50 reached a level of 6,287.85 points. More than 9 months later on October 27, 2008, it had fallen by nearly 60 per cent to a level of 2,524.2 points. Given that the stock market investors have a very short memory, Figure 3 is a very important chart. This happened just ten years back.

Of course, the retail investors who come in at the peak, get hurt the most, during such falls. What all this suggests very clearly is that the retail investors in the stock market are essentially chickens who are currently being fattened with good food in the form of returns. They are also assuming that this will continue. But what history tells us very clearly is that they are waiting to be slaughtered. And given that they will be caught unawares as and when the stock market falls, the bloodbath that follows will be ‘as usual’ extremely deadly.

Regards,

Vivek Kaul

This originally appeared in the Vivek Kaul Letter dated January 4, 2018. It was also published on Equitymaster on January 9, 2018.

## For every rupee sold by Indians, foreigners have invested Rs 6.2 in the stock market

Vivek Kaul
The BSE Sensex has been flirting with new highs these days. It touched an intra-day high of 22,030.72 on March 18, 2014. The Sensex had touched similar high levels in January 2008, more than six years back. It is interesting see how the Indian investors and foreign investors have behaved since then.
The foreign institutional investors (FIIs) have bought stocks worth Rs 1,56,517.42 crore between January 2008 and March 14, 2014. During the same period the domestic institutional investors have sold stocks worth Rs 25,184.3 crore. Given this, for every rupee worth of stocks sold by the Indian institutional investors, the foreigners have invested Rs 6.21 (Rs 1,56,517.42 crore divided by Rs 25,184.3 crore) in the Indian stock market.
Why has that been the case? There are number of reasons for the same. The investment bank Lehman Brothers went bankrupt in September 2008. This unleashed the current financial crisis. In order to tackle this crisis, the Western nations have run an easy money policy, which includes maintaining low interest rates as well as printing money, in order to get their economic growth going. The idea being that people will borrow and spend money at low interest rates, which will benefit businesses and in turn lead to economic growth.
The easy money policy has allowed the big institutional investors to borrow money at very low interest rates and invest it in financial markets all over the world. That is the major reason behind foreign investors investing Rs 1,56,517.42 crore since January 2008, in the Indian stock market.
In fact, things get even more interesting if we consider data from December 2008 onwards, given that the western nations started to run an easy money policy towards the end of 2008. Since December 2008, the foreign investors have invested Rs 2,59,354.8 crore in the Indian stock market. During the same period the domestic investors have sold stocks worth Rs 96,244.8 crore.
What explains this contrast? The easy money policies explain one part of the argument, they clearly do not explain why Indian domestic investors have stayed away from the stock market. Lets look at some data that might throw up some clarity.
Data provided by the Association of Mutual Funds in India(Amfi) shows that in January 2008, around Rs 1,72,885 crore was invested in equity mutual fund schemes. It is important to understand here that the money was invested in equity mutual fund schemes and not necessarily stocks. A mutual fund scheme that invests more than 65% of the money that it manages in stocks is categorised as an equity mutual fund scheme. Money invested in equity mutual fund schemes formed around 32% of the total money managed by mutual funds at that point of time.
In February 2014, the amount invested in equity mutual fund schemes stood at Rs 1,57,227 crore. Money invested in equity mutual fund schemes formed only around 17% of the total money managed by the mutual funds.
In January 2008, the amount of money managed by mutual funds stood at Rs 5,48,064 crore. This has since then gone up to Rs 9,16,393 crore. Hence, mutual funds are clearly managing more money than they were a little over six years back, but the amount of money they manage under equity schemes has clearly come down.
Since August 2009, the Securities and Exchange Board of India (Sebi) made it mandatory for mutual funds not to charge any entry load on mutual fund schemes. Prior to this, out of every Rs 100 put in by an investor in any equity mutual fund scheme, Rs 2.25 used to be charged as an entry load and passed onto the agent as a commission.
With almost no commissions on offer, agents stopped selling equity mutual fund schemes to retail investors. Hence, the amount of new money coming into the equity mutual funds and through them to the stock market has come down dramatically. What has also not helped is the fact that investors have redeemed their investments in equity mutual fund schemes big time since January 2008.
Investor interest has also gone away from unit linked investment plans (Ulips) offered by insurance companies. Ulips are essentially investment cum insurance plans which offer the investor an indirect option of buying stocks among other things.
In the bull market that ran from 2004 to 2008, banks and insurance agents mis-sold Ulips big time given the high commissions on offer and in a large number of cases promised to double the money invested in three years. By now a large number of Ulip investors have figured out that the only person who gained in case of Ulips was the insurance agent. Hence, investors have stayed away from investing in Ulips and through them into the stock market.
Given this, unlike the foreign investors, the Indian institutional investors have found it difficult to raise money to invest in the stock market over the last six years. And that explains to a large extent the fact that foreign investors have invested a lot of money in the stock market, whereas the Indian investors have stayed away.
The article originally appeared on www.firstbiz.com on March 19, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)

## Why minority investors protesting against Maruti Suzuki stinks of hypocrisy

Vivek Kaul
The minority shareholders of Maruti Suzuki are not a happy lot these days.
They are protesting against the decision of Maruti Suzuki’s parent company Suzuki, to establish a car plant in Gujarat, under its wholly owned Indian subsidiary, Suzuki Gujarat. The cars produced by Suzuki Gujarat will be sold to Maruti Suzuki.
This has not gone down well with the minority investors. The
Business Standard reports that seven mutual funds (HDFC MF, Reliance MF, UTI MF, DSP BlackRock MF, SBI MF, Axix MF and ICICI Prudential MF) have written to the company against this proposal of setting up a new car plant in Gujarat under the aegis of Suzuki Gujarat. The Life Insurance Corporation(LIC) of India, the big daddy of Indian stock markets, has also sought details on this from Maruti Suzuki.
There are various questions that are being raised on this decision.
Analysts point out that that Maruti Suzuki currently has around Rs 7,000 crores of cash. Why is this cash not being utilized to make cars, rather than just buy them from a subsidiary and then sell them? Also, the depreciation benefits on setting up a new plant would help the company bring down its effective rate of tax, the analysts point out. In short, it makes immense sense for the company to set up a new car plant, instead of buying cars from a subsidiary of its parent company.
The analysts further point out that with this move, Maruti Suzuki might be in considerable danger of being regarded just as a trading company, which buys cars and then sells them, rather than a manufacturing company. If this were to happen, the stock would be de-rated.
As a fund manager told the Business StandardTrading concerns (companies) trade at significantly lower PEs [price to earning ratios] than manufacturing ones.”
News reports suggest that the Securities and Exchange Board of India (Sebi) is looking into the issue, given that it is a related party transaction. Suzuki owns 56.21% of Maruti Suzuki and it owns 100% of Suzuki Gujarat.
The Companies Act 2013, defines a material related party transaction as one which in aggregate exceeds the higher of 5% of the annual turnover of a company or 20% of its networth. A report in the Mint suggests that Maruti Suzuki will take approval from its minority shareholders on this.
Prima facie it seems correct that the minority shareholders are protesting. But the question is where are they when the government of India is ripping the public sector units? Take the case of Coal India, which on January 14, 2014, declared an interim dividend of Rs 29 per share. The government owns 90% of the company and as a result got a total dividend of Rs 16,485.71 crore.
The government also earned a dividend distribution tax of Rs 3,113.05 crore, thus netting a total of Rs 19,598.76 crore.
This dividend was essentially declared to help the government meet its fiscal deficit target. Fiscal deficit is the difference between what a government earns and what it spends. The money handed over to the government of India could have been used to produce more coal and thus help India become self sufficient when it came to the consumption of coal.
ICICI Prudential MF is one of the seven mutual funds which have written to Maruti Suzuki Ltd. Data from
www.valueresearchonline.com shows that as on January 31, 2014, the mutual fund owned Rs 72.91 crore worth of Coal India shares through the ICICI Prudential Dynamic Fund. Why was there not a whiff of protest from ICICI Prudential MF, when the government decided to rip off Coal India? Like it owns shares in Maruti Suzuki, it also owns shares in Coal India. The same was the case with LIC, which owned 1.83% of Coal India’s shares as on December 31, 2013.
Or take the case of ONGC being forced to pick up 5% stake in the Indian Oil Corporation from the government of India.
This is expected to cost ONGC around Rs 2,500 crore. This is nothing but a move by the government to strip the company of the cash it has on its books.
Data from
www.valueresearchonline.com shows that HDFC Mutual Fund, as on January 31, 2014, owned shares of ONGC worth Rs 207.23 crore, through HDFC Top 200 fund. It also owned shares worth Rs 165.08 crore through HDFC Equity Fund. Why did HDFC MF not protest when the government was busy ripping off ONGC? LIC decided to keep quiet in this case as well. As on December 31, 2013, the insurance major held 7.82% of the total number of shares of the company. No mutual fund has protested against the government forcing public sector banks to pay interim dividends. As has been noted here on FirstBiz, the public sector banks are not in great shape. . As the latest RBI Financial Stability Report points out“Among the bank-groups, the public sector banks continue to have distinctly higher stressed advances at 12.3 per cent of total advances, of which restructured standard advances were around 7.4 percent.”
The stressed asset ratio is the sum of gross non performing assets plus restructured loans divided by the total assets held by the banks. In this scenario where the stressed assets of public sector banks are on the higher side, it makes sense that these banks not be forced to declare interim dividends. The money thus saved should be used to shore up their capital.
Given these reasons, the protest of mutual funds and LIC against Maruti Suzuki, basically stinks of hypocrisy.
The article originally appeared on www.FirstBiz.com on March 5, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)

## 10 things the Cobrapost sting tells us

Vivek Kaul

Stings in India till now have been carried out to expose politicians. The Cobrapost sting is the first sting that has brought into the public domain the murky way in which the big Indian private banks operate. But more than just exposing the murky way in which big banks operate, the sting brings out in the open other uncomfortable truths as well.

1. The finance minister P Chidambaram in his recent budget speech had said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” Of course no one took that number seriously. We now know why.
The Cobrapost sting clearly shows us that there are many more people with a taxable income of more than Rs 1 crore. The straightforward and more than helpful way in which the banks were ready to help invest the black money of the ‘supposed’ politician that the Cobrapost reporter was fronting for, can only tell us one thing: Banks seem to be doing this regularly.
And given this we can only conclude that there are many people out there with taxable incomes of more than Rs 1 crore, who don’t pay tax, than just 42,800. While it’s an obvious conclusion that did not need this visual evidence, but it is still an important conclusion nonetheless.
2. The second thing that the sting tells us is that those who have black money do not keep all of it under their mattresses. A lot of it as we know goes into buying real estate (largely benami). But the holders of black money seem to like to diversify their hoarded “wealth”. As the Cobrapost press release points out “(Banks) accept huge amounts of cash and invest it in insurance products and gold.” The money invested in insurance products is in turn invested in stocks, government securities and financial securities issued by corporations. So hoarders of black money do seem to be following the age old investing principle of “don’t put all your eggs in one basket”. They seem to be buying everything. From gold. To real estate. To stocks. And even have money in fixed deposits with banks.
3. By investing at least in gold and fixed deposits, hoarders of black money also show us that they like to have some liquidity in the assets that they own. Real estate is not terribly liquid and neither are insurance policies.
4. The sting also shows our love for gold which goes with the large amount of black money in this country. Very small amounts of gold can be used to store a large amount of black money as wealth. India has lot of gold because Indians love it is the normal claim that is made, but India also has a lot of gold because there is a lot of black money floating around.
5. The good bit is that instead of just lying around under the mattresses of people, some of the black money is coming into the financial system. When people buy insurance policies which in turn buy either debt securities issued by the government or the private sector or invest in shares issued by a company getting listed on the stock exchange, they are in some way financing someone who needs the money. That is the ultimate job of any financial system. To move money from those who have it, to those who need it. Now what proportion of the total black money comes into the financial system, that no one has any clue off. But its better than people just channelising all their black money into land and other forms of real estate. Also as more of this money comes into the financial system the greater are its chances of being detected.
6. The other interesting thing is that banks are helping channelise black money into insurance and not mutual funds. The main reason for this is the fact that insurance companies pay a much higher commission than mutual funds do, even though mutual funds remain a much superior mode of investing. It also goes with the cross selling that banks tend to do these days given that almost all of them own insurance companies. So if you have ever wondered why the moment you enter a bank they try to sell you all kind of insurance policies and not attend to the need you really went there for, you now know the answer.
7. Another major reason for banks selling insurance and not mutual funds to this set of clientèle who wants to put its black money to work is the fact that the know your customer (KYC) norms for mutual funds are much stronger than those required to invest in insurance. This is clearly an anomaly that needs to be done away with. Either mutual fund KYC norms need to be weakened or insurance KYC norms need to be strengthened. If it was not for these KYC norms, mutual funds remain a better way of hoarding black money given that they are very liquid. You can buy a mutual fund today and sell out tomorrow (unless you are buying a tax saving mutual fund that comes with a lock-in of three years). The same is not possible in case of insurance which comes in with a minimum lock-in of five years. Hence, mutual funds also need to be provided equal access to black money as insurance has. Also someone who has a lot of black money and is wealthy, doesn’t really need to pay for the “pure” insurance that compulsorily comes with the investment oriented insurance plans.
8. The sting also tells us that banks have double standards. If you are ready to deposit/invest a lot of money with/through them, then they are more than ready to lay out the red carpet for you. If you are not, then try changing your address once and wait for all the proofs they want. Or try asking for a locker, and wait for the bank clerk/relationship manager to tell you that you will also have to open a fixed deposit of a few lakhs to get a locker. Meanwhile as the Cobrapost press release points banks “ allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash.” Or try depositing money and the bank clerk will give you a nasty look for having to count the total amount of money you are depositing. Whereas if you have black money, the bank will come to your residence to collect it. As the Cobrapost press release points out the bank will “personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine.” Wow.
9. What the sting also tells us is that how simple it is to create a fake identity in this country. The rapist Bitti Mohanty could do it. So can you if you have black money. And the banks will help you with it. As the Cobrapost press release points out “ICICI Bank officials were ready to make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable. On the other hand, Axis Bank officials proved to be a notch above in inventing fraudulent means. Use “sundry” accounts of the bank, they suggested, to deposit all the illegal cash from where it is to be routed into investment. Either use accounts of other customers, for a fee, to transfer money abroad, or use some shell company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips.”
10. And to conclude, what the sting clearly tells us is that everybody who pays Income Tax in this country is basically an idiot who is being taken for a royal ride. If you have a lot of black money and you are not paying tax on it, chances are somebody out there is waiting for you with a red carpet.

The < a href="http://www.firstpost.com/business/10-things-that-the-cobrapost-sting-tells-us-about-banks-661376.html">article originally appeared on www.firstpost.com on March 14, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

## Adi Godrej’s Marie Antoinette moment: Indian farmer should invest in stocks

Vivek Kaul

Qu’ils mangent de la brioche” is a French phrase which means “let them eat cake” in English. It is often attributed to the French Queen Marie Antoinette. She had apparently said this to peasants when she came to know that they had no bread to eat.
There is no record that the Marie Antoinette, wife of Louis XVI ever uttered these words. But the myth has held even after all these years. And the story does make a broader point about the rich often having no idea about the state of the poor in their country.
A good example of this is Adi Godrej, the current president of the Confederation of Indian Industry (CII), who recently had his Marie Antoinette moment. In a recent interview to the Tehelka magazine Godrej suggested that the Indian farmers should sell their land and invest the money they get in stocks and mutual funds.
If India has to become a developed country, you cannot have the livelihood of hundreds of millions of people depending on agriculture. They have to move on. They have to move into industry, into services. That’s how you develop a country. That has happened in every country,” Godrej said.
He further went onto add that the money that the farmers get by selling their land should be invested in stocks, so that it does not run out soon. “Why should it run out soon? It can be invested. It can be made into a much bigger value than land. Land has the lowest appreciation of all assets. The best investments are in stocks. Somebody should advise them to invest it in mutual funds so their wealth will rise faster,” Godrej said.
Let’s try and examine these statements in a little more detail. Agriculture contributes around 14% of India’s gross domestic product (GDP). This has fallen dramatically since 2004-2005, when it used to contribute around 19% of India’s GDP. At the same time it employs around 58.4% of India’s population. (Source: http://www.india.gov.in/sectors/agriculture/index.php).
So 58.4% of India’s population contributes around 14% of India’s GDP. It need not be said that this is a terribly inefficient way of working. Ruchir Sharma of Morgan Stanley calls this “a disturbing tendency of the farmer to stay on the farm” in his book Breakout Nations.
The contribution of agriculture to the overall GDP is expected to continue falling in the years to come. A calculation carried out by the Planning Commission shows that the contribution of agriculture to the total GDP would fall to as low as 7% by 2025-2026. This calculation assumes a fairly optimistic growth of 4% per year in agriculture GDP. At a growth rate of 2%, agriculture’s contribution to overall GDP by 2025-2026 is expected to be at 5.2%.
In making these calculations the Planning Commission assumes that the overall GDP will keep increasing by 8% every year, which is a very optimistic assumption to make given the current state of affairs. (You can see the calculations here).
But even assuming a 4% growth rate for agriculture and just 6% for overall GDP, the contribution of agriculture to the overall GDP can be expected to fall to around 9.8% (This is my calculation and not of the Planning Commission),from the current 14%.
So theoretically the contribution of agriculture to GDP will fall in the coming years. This can be said with utmost certainty. This means that other sectors of the economy like services and industry will grow at a much faster rate. Hence, it makes sense for farmers to sell their land, move on from farming and move onto other sectors of the economy.
And that’s what Godrej suggested in his interview to Tehelka. But even after that if the Indian farmer is unwilling to sell his land there must be some reason to it.
Akhilesh Tilotia of Kotak Institutional Equities has done some interesting analysis on this. As he points out in a recent report “a farmer makes about Rs30,000 per acre a year (assuming two crops a year) if he grows staples like wheat or paddy. One can argue that the price at which a farmer should be happy to sell the land would be at Rs 2-3 lakh an acre (or seven to ten times his annual income from the land).”
But then money is not the only issue at hand. As Tilotia writes “However, there is an element of sustainability and certainty for the farmer from agriculture and he suffers from a lack of skill to get him or his family employed elsewhere (either in the plant coming up or in the urban services industry): All this means the farmer is looking at farming as a means of livelihood and not from a pure ‘return on capital’ perspective.”
The average farmer does not want to sell out because he is not skilled enough to do anything else. A lot of them are still uneducated given that the effective literacy rate in India is around 74%.
Also the average land holding of an Indian farmer is around 1.4 hectares (one hectare equals around 2.5acres).This is very small and even if he sells, he is unlikely to make much money from it. The right to property is not a fundamental right in India. And over the years the government of India has acquired land forcibly from the citizens of this country at rock bottom prices. This is an impression that cannot be gotten rid off overnight. And hence the Indian farmer is unwilling to sell his land.
But things have gradually started to change as the government has started to offer reasonable prices for acquiring land. “National Highway Authority of India’s cost of acquisition of land was Rs 25lakh per acre in Financial year (FY) 2011…It acquired 8,533 hectares in FY2011, up from 3,120 hectares in FY2009. In FY2012, NHAI expects to acquire 12,000 hectares. The size of land acquisition is up 4 times over the past four years when the going narrative has been that land acquisition has been made impossible in India,” writes Tilotia.
So just saying that the Indian farmer needs to move is not enough. The conditions have to be right for him. He needs to have the skill-set to move on, which he currently doesn’t. Very little attempts are made by the government to rehabilitate those whose land is acquired. And more than that, the farmer needs to be offered the right price, which he wasn’t being offered till very recently.
The other suggestion that came from Godrej was that farmers should invest in stocks and mutual funds. It would be nice if he goes through a November 2011 presentation made by the
by the India Brand Equity Foundation (IBEF). This shouldn’t be difficult given that IBEF is a trust established by the Ministry of Commerce with the CII. As pointed out earlier Godrej is the President of the CII.
The presentation throws up some interesting facts: A few of them are listed below:
– Despite healthy growth over the past few years, the Indian banking sector is relatively underpenetrated.
– Limited banking penetration in India is also evident from low branch per 100,000 adults ratio – – Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia
– Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch
– Only 40 per cent of the adult population has bank accounts.
Given this it is unlikely that many Indian farmers have banks accounts. How can those who don’t even have bank accounts be expected to invest in the stock market? Also the stock returns in India even over the long term haven’t been great. The BSE Sensex over a period of 20 years has given a return of 8.9% per year. And even these returns haven’t been guaranteed.
So the first thing that Indian farmers should be doing is opening bank accounts.
Also, how can farmers be expected buy stocks when even the Indian middle class, which makes much more money than the Indian farmer has stayed away from investing in stocks. And there are genuine reasons for it.
As Shankar Sharma of First Global told me in a recent interview I did for the Daily News and Analysis(DNA): “We see too much of risk in our day to day lives and so we want security when it comes to our financial investing. Investing in equity is a mindset. That when I am secure, I have got good visibility of my future, be it employment or business or taxes, when all those things are set, then I say okay, now I can take some risk in life. But look across emerging markets, look at Brazil’s history, look at Russia’s history, look at India’s history, look at China’s history, do you think citizens of any of these countries can say I have had a great time for years now? That life has been nice and peaceful? I have a good house with a good job with two kids playing in the lawn with a picket fence? Sorry boss, this has never happened.”
This statement is as valid for the Indian farmer as it is for the Indian middle class. And so it’s time Adi Godrej realised that things in the real India are a little different. Marie Antoinette
may not have said “let them eat cakes” but Adi Godrej surely did.