Do it yourself

Tuesday, April 16, 2019

Food inflation conundrum

"Wishing all readers happiness and gaiety on occasions of MAHAVIR JAYANTI and EASTER."

Next post will be on Monday, 22 April 2019.

Some food for thought

"We have no firm hold on any knowledge or philosophy that can lift us out of our difficulties."

—Anne Sullivan (American Educator, 1866-1936)

Word for the day

Conlang (n)

An artificially constructed language used by a group of speakers, as opposed to one that has naturally evolved such as Esperanto and Klingon.

First thought this morning

Looking for some inspiring story for my story telling session in a municipal primary school, I came across this story of a brilliant woman, Ms. Krishna Yadav (see here).

Krishna ji, hails from a small village in Western UP. Daughter of a small farmer, she never went to school and was married to a man who dropped out of school in 3rd standard.

More than a decade back, economic stress and fate brought the family to Delhi NCR in search of job and a dream to give good education to two children. The couple started with leasing a small piece of farm land in Gurgaon and growing vegetables. Growing and selling vegetables however did not make them enough money to make two ends meet. Krishna Ji then decided to do something more. She attended a very short term course of pickle making run by Agriculture Department, and started making pickles at home. Her husband would sell the pickle made by him along with the vegetables he grew on a table put on roadside.

Krishna ji kept innovating new products while maintaining high standards of quality and hygiene she had learned during her training. Soon the business started with a capital of Rs3000, grew manifold. Though illiterate, she used all techniques of business management. She did backward integration by putting with her own mustard oil mill and spice processing unit, to manage cost and high quality.

Today she provides employment to 1500 mostly uneducated women and makes 200 varities of pickles, jams, juices, etc. Her daughter has completed BSc and BEd and aspires to be a good teacher.

The best part is that her pickles are amazing and her workshop & shop happens to be just 500mtrs from my house, and I never knew about this till I watched this YouTube video.

Food inflation conundrum

India has received below normal rainfall in each year since 2014. Some estimates suggest that even 2019 southwest monsoon could be below average. In past year the total food grain production has increased by just 2% CAGR. A substantial hike was also announced in minimum support prices (MSP) for various crops last year. Last five years have seen almost 50% jump in total personal disposable income of India. But all this has failed to impress food inflation that has mostly trended down in past five years.

I feel, this food inflation conundrum needs a much deeper study by experts of the subject.

As a common man what I could gather from speaking to other common man on street is as follows:

There are multiple reasons.

(a) Historically, the food prices in India have been controlled by hoarding mafia. After Demo the holding capacity of hoarders has been hit badly. This has resulted in persistently lower food prices, especially in popular items like pulses, onions, tomatoes etc.

(b) On the other hand, there has been significant improvement in supply due to better seed quality and improved irrigation facilities. However, this higher supply has not been met with equivalent rise in household demand. The reasons for this poor demand growth could be as follows:

(i) Decline in effective wages. Despite higher total disposal personal income, wages have trended down. This indicates that averages for per capita income and disposable income have got much more skewed due to rise in income inequality.

(ii) Rise in discretionary expenses, like telecom, transport, education and health.

(c) The most important argument is that though the rate of annual food inflation is low, the absolute prices of many commodities are high and unaffordable for many. We may need substantial rise in wages to correct this anomaly. Apples at Rs200/kg and Mangoes @Rs150/kg are unaffordable even for many middle class households, though their annual inflation rate may be close to zero.

(d) Liberal imports has led stabilization of pulse, oil seed and onion prices. Cartel led by some politicians and large business families appear mostly broken.

(e) Better regulation of commodities' future trading and closure of NSEL has also helped curbing excessive speculation, in view of some traders.

(f) Globally the crop productivity improvement may have peaked, but India has still long distance to go. The visibility of future productivity improvements is very high, and that may keep food inflation expectations anchored.

On the other side, all major political parties are promising material rise in farmers' income and social security net for urban poor, unskilled and unorganized workers etc. This will eventually lead to rise in demand for food items.

Moreover, the climate change is now reflecting ominously on weather and crop patterns world over. This may lead to supply disruptions and higher prices, rather abruptly.

It is therefore important that all policy makers and market participants take a holistic view of the inflation trajectory and plan accordingly.

For the time being, I am cutting weight of food inflation in my investment strategy matrix by 50%.

Wednesday, April 10, 2019

Heads or Tails

Some food for thought

"You have to look for teachers. If you want to be a mechanic, go hang out with mechanics."

—Robert Kiyosaki (American Author, 1947)

Word for the day

Funemployed (adj)

Without a paid job but enjoying the free time, e.g., Ask one of your funemployed friends to come along with you.

Heads or Tails

If I were a first time voter, and I am asked to choose a national party to vote for, exclusively on the basis of its manifesto, I will be left with absolutely no choice but to toss a coin — BJP if it comes Head, and Congress if it is Tail.

The recently released manifestos of both the parties sound so similar that it is almost impossible to choose one over another. After spending 6hours, trying to decipher substantial differences in agenda of two parties, I could find nothing, except stand on Art370. In fact it might be for the first time that two national parties have openly and abundantly accused each other in their manifestos.

Exasperated, I gave the exercise to my daughters aged 17 and 15, of course as a punishment for exceeding their screen time limit. Forced, they studied both the documents carefully, discussed these threadbare and came out with the following differences:

(a) The font used in both the document is different. Congress party appears to have chosen Arial in 8size with paragraphs left aligned, with some extra space in between lines to make it an easy reading. BJP on the other hand has used unconventional Century Gothic in 10 size, justified paragraphs with no space between lines, making it cluttered and tough to read.

(b) Congress has used a liberal dash of Saffron, Green, Blue and Grey to make it look inclusive and secular. BJP on the other hand has used only Saffron, with a slight tinge of green in the bottom line, to align it with Right Wing nationalism.

(c) Congress has liberally admitted to its historical mistakes and blunders. BJP has however avoided all topics where its performance could be questioned.

(d) Both the parties have claimed that their respective manifestos have been prepared in consultation with common people and experts. Naturally, the agenda must be same, as the concerns and issues of the people remain the same irrespective of the party in power.

However, a close study of documents highlights that both the parties have touched the concerns of the people only reluctantly. They have rather tried to pass their pre determined agenda for people's will.

Congress document has imposing American influence. The jargon like Homestead Act, Para State Workers, Regulatory Forbearance, High and Suatained Economic Growth, Fortune500, Scenario Planning and Strategic Future Office, etc., and commitment to ratify ILO conventions 87 & 98 (Freedom of Association and Right to Organise and Collective Bargaining) etc. clearly indicate the constitution of group responsible for drafting the Congress document.

The BJP document has vivid imprints of RSS jargon and terminology.

(e) Congress has made "Jobs" the starting point of its manifesto; whereas BJP has placed "National Security" on the top.

Barring the placement in the document, there is hardly any difference in the agenda and approach regarding national security in both the documents. In fact, in many places both the documents even use the same language. The media narrative on this issue therefore appears totally mischievous.

Admission of historical failures and blunders

The best part of Congress manifesto is that it has admitted to historical mistakes and blunders committed by various government, including Congress governments. For example consider the following:

"A basic weakness of the Indian economy has been infrastructure. Flawed design, inefficient execution, insufficient capacity and poor maintenance of infrastructure have dragged India’s growth rate down."

"Congress promises a fair deal for the crores of workers and the self-employed who toil every day in the unorganised and informal sector."

"Many years ago, Jawaharlal Nehru said, ‘Everything can wait but not agriculture."

"Our economy is still over-regulated. Structural problems remain. Government control and bureaucratic interference are aplenty. Regulators have morphed into controllers. There is growing interference by the courts in economic policies."

"Congress recognises that business—be it manufacturing or supply or trade or exports—runs best on predictable and stable laws, protection of property rights and sanctity of contracts"

"Foreign tourist arrivals in India in 2018 is estimated at about 1 crore. Comparing this number with the numbers of comparable countries, it indicates substantial under-performance."

"Congress believes that a large country like India cannot be administered by the Central Government alone. In fact, in most matters concerning the daily lives of the people, it is the State Government that is close to the people and, in some matters, it is the Local Government (Municipality or Panchayat) that is even closer to the people."

"Congress believes that we are an over-legislated and over-regulated country. Laws, Rules and Regulations have proliferated and restricted freedoms. Consequently, there are severe restrictions on innovation, enterprise and experimentation, and economic growth has suffered."

"The greatest challenge to free and fair elections is the Election Commission’s inability to prevent the use of black money in election campaigns and the use of inducements to influence voters."

"Denotified and Semi-Nomadic Tribes have long suffered discrimination and neglect."

Congress recognises the sexual diversity among people and promises equality and equal rotection of the laws to people with different sexual identities.

"Education is a merit good and must be available to all children as a public good."

"Schools, colleges and universities shall be, mostly, public institutions funded through public resources. Private educational institutions may supplement public educational institutions."

"It is a bitter truth that India’s environment has deteriorated. The 2018 Global Environmental Performance Index placed India at rank 177 out of 180 countries."

"It is not possible to eradicate poverty without tackling the dual threats of climate change and natural disasters. It is the poor who suffer most on account of natural disasters and climate change."

BJP has apparently not admitted to any mistake.

Over next couple of days, I shall analyze specific proposals in the manifestos of BJP and Congress, especially from impact on investment strategy view point.

Tuesday, April 9, 2019

A colossal Ponzi scheme

Some food for thought

"Be polite; write diplomatically; even in a declaration of war one observes the rules of politeness."

—Otto Van Bismarck (German Leader, 1815-1898)

Word for the day

Multiverse (n)

A hypothetical collection of identical or diverse universes, including our own.

First thought this morning

The eligibility criteria for Lok Sabha membership has been a matter of seasonal debate ever since we adopted our constitution in 1950 and became a full-fledged electoral democracy. Four issues are debated in particular— (1) Whether minimum age for contesting Lok Sabha elections should be same as minimum age for voting, presently 18yrs; (2) Should there be a minimum educational qualification criteria for members of parliament; (3) Should there be a limit on maximum number of children a Lok Sabha candidate can have; and lastly (4) Should the people with serious criminal charges be allowed to contest elections.

"Minimum educational qualification for MPs" and "criminal charges" issues are however debated more intensively around every election.

Given the state of criminal justice system in our country, the issue of "criminal charges" is difficult to decide. It appears that the best has already been achieved in this regard by prohibiting convicts of offences entailing a jail term of 2yr or more, from contesting elections for six year. The proposal to impose a life ban is also under consideration.

Insofar as minimum educational qualification is concerned, I have strong views that may not necessarily be in agreement with any side of the debate.

In my view, while it is an advantage to have knowledge of a wide variety of technical subjects to participate in the parliamentary debates and make constructive contribution, it is not at all necessary.

The primary function of a member of parliament is to represent the people in his constituency. He should know the problems, aspirations and needs of his constituents and should be able to present these to the concerned departments and insist on expeditious solutions.

The knowledge of the "system", "standard operating procedures (SoP)", and "the Constitution" is therefore must. It is therefore important that before taking oath of office, all first time elected members of parliament are required to complete a 3month intensive certification course in Constitution of India and parliamentary procedures.

I assume the people who've won elections would possess strong communication skills and fully understand the problems, aspirations and needs to their constituents. Nonetheless, it should be made mandatory for all elected representatives (not just the first timers) that before taking oath of office they attend a two day workshop in their constituency, where the district officers (administrative and police), local representatives (MLA and Local Body members), recognized trade association representatives, and active civil society members would make presentations to them about the important local issues, requirements, growth potentials and aspirations etc. The Member must be given specific goals to be achieved in his/her term as such member.

It must be made a practice that every year after the conclusion of budget session, they report back to this assembly of people, what efforts the Member made to achieve the desired goals.

I strongly believe that implementation of these suggestions would strengthen our democracy; and restore the trust and confidence of people in the "System".

A colossal Ponzi scheme

In past four years, small savings of Indian households have seen a threefold jump. From ~INR50bn in FY15, the contribution of Indian households to National Small Savings Fund (NSSF) has increased to INR157bn in FY18.

Small savings include (a) All deposits with post office; (b) Saving certificates (KVP, NSC etc); (c) Social security deposits (PPF, Senior Citizen Saving, Sukanya Smrudhi etc.)

In this context two things are important to note:

(a) The interest rates on small savings are mostly pegged to the government security of equivalent maturity. These are announced every year and are generally fixed 25bps to 100bps higher than the yield on comparable government security. In some cases, like Sukanya Smrudhi, these rates are fixed at much higher level.

(b) The net collection in small savings is used to buy the securities of the state government, where these savings are collected. The receipts of NSSF from redemption of state government securities are used to buy central government securities.

Thus, small savings are very important source of financing fiscal deficit. Though these funds are shown as a liability of the central government, no provision in budget is made for repayment of these funds. In that sense it is like a colossal Ponzi scheme in which all redemptions are met only through fresh deposits.

A related interesting trend is the changes in the ownership pattern of government securities (Gilt) in past few years.

Since FY12, the share of commercial banks in ownership of Gilt has declined from 54% to 40% in September 2018.
RBI has also reduced its holding of Gilt materially. At the end of FY15 RBI owned 14% of outstanding Gilt. The holding had fallen to 7% by September 2018.
Since FY15, foreign institutions have also cut their holding by 50%, from 4% in FY15 to 2% in September 2018.
The contribution of small savings (MFs, Insurance, NSSF, PPF etc.) has grown materially since FY12.