Foreign Money driving markets: The beginning of the Bubble?!

‘’17000 crores pumped by foreign investors in Equities and Debt‘’

‘’Cabinet approves raising FDI to 15% in Indian Stock Exchanges, a depository, a banking company, an insurance company, a commodity derivative exchange’’

No to FDI before elections, fervent pitches and a slew of measures to attract FDI after elections. Political implications apart, are we in our greedy pursuit for foreign money putting the economy in a currency crisis like situation??!

Carry trade: A lot of FII money that comes into India has often been associated with P-notes while the rest has often been credited to the easy money policies of countries, which seems to the case now with the Shinzo Abe government of Japan planning to release a stimulus package of 265 Billion $ to stimulate the economy & The Bank of Britain expected to do the same in the near future. It is simple economics that a considerable part of investment would find its way to the bright spot in the World – India. The situation of the South East Asian currency crisis and where we are looks the same: Foreign investors pumping money, asset classes getting over valued and Indian retail investor participation increasing – Are we again headed to a situation where the valuations will rise and then the FII (fly by night money, as in popular nomenclature) money disappears causing a horrible crash! Scary are the eerie realities!

Foreign Exchange reserves: Adding to the worry is the fact that we have amassed one of the largest foreign exchange reserves in the world, chink in the armor the composition which is roughly 70% of FII money or fly by night money and the rest 30% FDI, thereby putting the delicate Current Account at a further risk

The situation may look grim, but the very prospect of not having 100% capital account convertibility could prove to be a blessing and an insulation against these vagaries. However there has to be a cautious approach to selectively open up rather than using it as a bandage effort to try repair/rebuild the economy.

The question however remains, are we as a country ready to embrace 100% capital account convertibility??? Read on the next article to know more!

Till then... 

Read, Ponder and Forget!

Pulses: Achilles Heel of Agriculture?!

164 Million Hectares of land under cultivation, 130 million hectares at the mercy of the rain god! Food insecurity in the 90’s to the recent dip in pulse availability – The majority employer of the economy – Agriculture never looked in a distress as good and bad as this!

Calls for a Green Revolution of pulses are a raging debate, so have the noises backed by research indicating the dip in productivity of the very lands that the Green Revolution blissfully wedded.

The Pulse shortage isn't in fact a recent phenomenon, but a continuum beginning to explode now, case in point being the fact that: 2001-2011 – Production – 158 Tonnes, Demand – 186 Tonnes – The Gap has only widened over time. The reasons many:

1.     Lack of productivity and the existence of the subsistence economy: Lack of developed forward and backward linkages have always meant a dead bargain for the agricultural community. Imagine 130 Million hectares of 164 Million hectares being left to the mercy of the rain god – an ode perhaps to the irony of development! Average holding of land is 1.4 hectares, but so is the rising issue of disguised un-employment in the villages leading to farm to mouth existence of the agricultural community leading to further depletion of stock. The above issues are only further exacerbated by the fact that no longer does the farmer community see agriculture as remunerative, as pointed by the declining re-investment in agriculture over time!

2.     Procurement & Minimum Support price: The concept of state intervention has always lead to market distortion, with the government left at the mercy of the ever powerful farmers lobby belonging to the green revolution belts. The irrational price hikes of Rice and Wheat have often been used as an election ploy to shore up votes, thereby acting as a discouragement to farmers to move away from other crops irrespective of the soil and climatic conditions required to support a crop.

3.     Livestock integration: Last but not the least is the issue of livestock integration. World over it has been agreed that livestock acts as a counter cyclic buffer to the vagaries of agriculture cycles. It’s a pity that in spite of such diverse fauna, livestock contributes just around 30% while in other countries its close to 50%, thereby exposing the farmers to the vagaries of nature and life.

4.     Food Corporation of India or Fraud Corporation of India: Though a welcome step to hold stock to intervene rapid escalations, the concept of state procurement and subsequent storage in the FCI godown’s has been a disaster to say the least. The insufficiency of the cold chain facilities has only aggravated the mess. Its strange that rather than first ensuring the effective running of godwons and capacity management, the government has decided to procure 50,000 tonnes of pulses going forward.

5.     Import Route: Africa is the next growth pole and not too far behind are we, with the recent visit of the PM to Mozambique seen by many as a ploy to shore up additional pulse imports without un-settling the foreign reserves.

Knee Jerk solutions to pressing issues have only worsened the scenario in the country, be it the obsessive focus on green revolution or the concept of support prices. Perhaps the call of the day is improving the backward and forward linkages to make the agricultural sector remunerative.