Fixing Volatility

 Fixing Volatility

Why drought-hit India needs good commodities market more than ever

THE Prime Minister's speech on Independence Day recognised that the drought will impact agricultural production. He reiterated that nobody "should go hungry" because of this. But also of concern is the terrible effect that volatility in food prices has on some of the most vulnerable sections of our society.

The price of anything is determined is by demand and supply. If demand is "elastic" it adjusts to the level of supply, leading to rapid price stabilisation. But for agrcommodities, especially food products, elasticity of demand is very low- people have to eat. So relatively small changes in supply can lead to high volatility in food prices.

Another uniqueness of agricommodities in India supply can be artificially manipulated based on geographical area, which can lead to a big price difference in the prices of food items, and thus large arbitrage opportunities.

The classic example recently was the recent fracas over rice. When rice prices started firming interna- tionally, the government banned rice exports to prevent them from rising domestically. Naturally, they fell within India but internationally, they firmed up further, due to non supply of rice from a major source (India). This created an arti ficial, large price difference an arbitrage opportunity.

You could accumulate cheap rice domestically, and then tap contacts in Africa, which through diplomatic channels persuade our gov ernment to issue orders allowing exports to sub-Saharan countries on compassionate or diplomatic grounds. Then sales on the high seas could be used to divert these consignments to various European markets-thereby making huge profits for a selected few.

Similar mechanisms work in domestic markets which are geographically or otherwise dispersed. Then there are rampant, unorganised, and unregulated markets for "controlled" agro commodities in India. "Dabba trading", or pit trading, also happens in parts, creating a complete chain of intermediaries from top to bottom which restricts when knowledge about prices and open interna- positions to a very few operators manned who could then use it to manipulate from late market prices. Finally, differential transaction charges levied by exchanges concentrate volumes with a few major operators; so most market participants choose an arti- to trade through them (or se dabba traders). This can also create  insider information about open positions. Put together, this helps explain why so many small investors lose money in the commodities -gov-market-and why, in spite of negative inflation, a recessionary economy, and drought that hasn't hit fully supply yet, food prices in the country are unexpectedly high.

Price discovery for food products should be very transparent across geographical areas, should be without too many undisclosed intermediaries, and should be con- ducted in a well-regulated market. All price-sensitive information should be available in the public domain. Open positions in the market should also be generally known, as they are in well-constructed markets. Position holders should ideally be market intermediaries subject to some regulatory oversight.

The problem is that government times create artificial arbitrage of supply across different areas. This causes massive problems of the sort visible in the discussion about rice and adds to volatility. Fix this: free and fair movability graphical regions. (Sales tax dis- should be permissible across geo-parity should also to be removed. Different sales tax rates on food items in different states will just hold up the development of a healthy nationwide market

The Indian economy, as human enterprise and not value added, is dominated by agriculture. Around seventy percent of our population depends on this segment. A wholly transparent and well-regulated chain must be established between these producers and their consumers. What needs to be done for that? To start off with, well-developed transportation and warehousing facilities are a must. But who is going to invest in that? We are talking of massive infrastructure investment. Without a well-developed commodities market, it will be difficult to find and mobilise the required funds.

All the above objectives can be achieved if the market is brought under a powerful and transparent regulator-perhaps in the form of a Forward Market Commission (FMC). On lines similar to SEBI. Political interference could then be minimal. The regulator needs to be given real power, as well as a clear mandate to develop both the future as well as spot commodities market. The unorganised market should be encouraged to wither away; certainly, "dabba" trading should be scrutinised very carefully indeed for wrongdoing.

India is ready for this. Consumers and farmers are more than capable of taking advantage of a transparent, regulated and liquid market.

Food prices are still unexpectedly high. To fix that, all price-sensitive information should be available in the public domain. Open positions in the market should also be generally known, as they are in well-constructed markets; position-holders should ideally be market intermediaries subject to some regulatory oversight.

The writer is Alternate President of the Commodity Participants Association of India and associ- ated with the BJP's Chartered Accountant cell.

Money laundering and Tax havens

 Money laundering and Tax havens

By Gopal K Agarwal,

IN my childhood I read "India is a rich country inhabited by the poor. This statement always pricked my consciousness, and when I read India's Planned Poverty by Shri Daya Krishna, I was filled with self-pity. My conclusion is that corruption is the root cause of India's poverty.

The recent discussion on bringing back the Indians' black money stashed away in Swiss banks will give right stimulus and direction to the debate. Any commitment on the issue by political parties will be a clear message to the masses about their resolve to fight this menace. BJP's prime ministerial candidate Shri LK Advani's vow to bring back this money to the country is a welcome move.

In 2006, the revealed Global Financial Integrity Studies, developing countries lost an estimated Rs 43 lakh crore to Rs 51 lakh crore in illicit financial outflows. Even at the lower end of the range of estimates, the volume of illicit financial flows coming out of developing countries increased at a compound rate of 18.2 per cent over the five-year period, analysed by the study. On an average, during the five year period of this study,

Asia accounts for approximately 50 per cent of overall illicit financial flows from all developing countries.

Our people stashed away the money in these tax havens over the last 60 years. What is to be noted here is the fact that most of the wealth of Indians parked in these tax havens is illegitimate money acquired through corrupt means Naturally, the secrecy associated with the bank accounts in such places is central to the issue and not their low tax rates as the term 'tax havens' suggests.

Along with this phenomenon. If we put together some other related past events that took place in the country, we will come to know the modus operandi of the people involved and understand how the country was taken for a ride during the current regime. A route was needed to bring this money back through subverting the domestic laws and tax evasion. A unique operation was planned in the form of security transaction tax (STT) in place of capital gains tax.

This black money parked in foreign tax havens was routed through participatory notes and FIIs in Indian capital market. The Indian market got highly buoyed and saw unprecedented rise due to large sum of money chasing equity. The Indian counterparts of these very entities sold their holdings at a very high premium and thereby made huge capital gains on Indian bourses. With the removal of capital gains tax and introduction of STT. this group was able to bring back large amount of black money stashed outside the country and converted it into white without paying capital gains tax and paying little to the government in the form of securities transaction tax. The STT was introduced in the country, although it is detrimental to the Indian capital market. It has completely killed the liquidity and is instrumental in the extreme volatility in the market. All market participants had openly opposed it including National Stock Exchange of India and market regulator, SEBI.

Still we have lot of money stashed away, in foreign countries. We need to bring it back as is being done by crisis-laden Western powers, led by the United States. These countries have embarked upon a mission to force Swiss banks and other offshore tax havens to put an end to banking secrecy and bring back their tax-evading citizens' hidden wealth. Swiss Banking Association report, 2006 gives details of the bank deposits in the territory of Switzerland by nationals of following top five countries: India $1,456 billion, Russia $470 billion, UK $390 billion. Ukraine 100 billion and China $96 billion. India with $1456 billion has more money in Swiss banks than rest of the world combined. This bank deposit is about 13 times larger than the country's foreign debt. With this amount, 45 crore poor people can get Rs 1,00,000 each. This huge amount has been amassed from the people of India by exploiting and betraying them. Once this huge amount of black money comes back to India, the entire foreign debt can be repaid, and still we will have surplus amount, almost 12 times larger. If this surplus amount is invested in earning interest, the amount of interest will be more than the annual budget of the central government. Backwardness in our infrastructure, agriculture and other sectors can all be corrected using this money.

Gopal Krishna Agarwal is the National spokesperson of the Bharatiya Janata Party on economic affairs. 

Poll spending can bring boom in economy

 Poll spending can bring boom in the economy

By Gopal K Agarwal,

Elections have been declared. They will take place between  April 16 and May 13, 2009. As the elections are approaching, there is a frenetic reaching out to all the political spectrum. Many announcements and foundation-laying ceremonies are taking place across the country and across the party lines. Huge promises and schemes are being dolled out but they have neither been properly budgeted nor there is any hope of concrete action being taken on these announcements, Showbiz, is being carried out recently by the UPA government under the Bharat Nirman Programme All these announcements and the schemes of the government are going to put heavy pressure on the resources of the country. The government's recent measures include excise duty and service tax cuts. Then comes dearness allowance, hike for Central government employees and pensioners, and a scheme to build affordable housing while boosting other infrastructure projects. With the argument of global slowdown, the UPA is content that boosting consumption and investment is a bigger priority today than belt-tightening. The heavy fiscal deficit being resorted to by this government will put heavy strain on the incoming government.

The second important impасt on the economy will be the cost of the election process. It is estimated that the elections will cost to the tune of Rs 10,000 crore to the country, which is more than the estimated expenditure of Rs 8,000 crore on US elections. With the Election Commission being strict on the expenditure limits for the candidates and the parties, lot of unaccounted money will find its way in this channel. This situation will also definitely effect the economy in a big way.

The impending economic gloom throughout the world is definitely having major effect on our country. Our economy is in recession, and there is complete slowdown. The Gross Domestic Product (GDP) growth rate in the third quarter of 2008/09 was declared to be 5.3, year on year (yoy) basis, which is a sizeable drop in relation to 7.6, year on year (yoy) basis in the 2^nd quarter of this fiscal year. The stimulus package which was needed so badly to revive the economy. It is nowhere coming in the near future. There was an opportunity for the government to take action at the time of presentation of the Budget, but the government shunned its responsibility by terming it as an interim budget. Shri Arun Shourie wrote in his article in The Indian Express, "Extraordinary economic circumstances merit extraordinary measures, declares the finance minister in his new Budget, the last one of the government. Now is the time to take such measures." And then proceeds not to take them at all!.

There are job losses across the country, by falling production indices and mounting defaults. All this is putting pressure on our banks and the financial systems. The corporate sector is in doldrums, which is evident in episodes like Satyam and Maytas. This government has all along refused to recognise the seriousness of the crisis in which its mismanagement has pushed the country's economy. All its previous actions have brought little results. The prime minister had announced a special package for making Mumbai into an international financial hub. But Mumbai remains as it has ever been. The prime minister had pledged Rs 1,000 crore for this purpose, but till July 2007, as per Shri Kireet Somaiya MP, only Rs 16 crore and 16 lakh had been released. We see exactly the same sequence in regard to the promise that was made in the aftermath of the devastating flood in Mumbai. Not even a special package announced to reconstruct the Dharavi slum has resulted in a single shed of the promised reconstruction and development to come up.

And this outcome is typical across a range of projects. Shri Chidambaram had said that outcome is important; we will come out with Outcome Budget, nothing of the sort happened. He proudly announced that subsidies need to be sharply targeted, but the subsidy Bill has been mounting, without being focused towards the lower echelons of the country. The Prime Minister's National Highways project of the NDA government, which had given tremendous boost to the economy, has been brought to a gruesome halt. The Fiscal Responsibility Bill (FRB) has been thrown to the dustbin.

As per the Kotak Equities research team, the alarming level of deficit in the late 1980s contributed to the complete breakdown of our economy in 1991. During that period, the gross fiscal deficit was on the average 7.7 per cent of GDP. Now the gross fiscal deficit of the Centre is 6.4 per cent of the GDP and if the off-budget items are included, it becomes 8.1 per cent; and if the state's deficit is included, it becomes over 10.7 per cent.

The Fll's are selling heavily in the capital market, which is evident in their daily sales figures as given by SEBI. The dollar is appreciating to a new high each day. On the other hand, the government, in its anxiety to prevent public unrest at the time of elections, is trying to stop the stock market from plummeting further by asking Indian institutions to buy in the market. All these points out to what the future holds for us. This is in a way, providing an exit route to the foreign institutions, and is highly questionable.

The elections also do not give hope of a clear and strong mandate to any one national party. regional parties will be in a deciding position. The situation is quite different than earlier elections when national parties got more than 75 per cent votes and regional parties got less than 25 per cent votes and were limited in number. If in the current scenario public gives a fragmented mandate, India will be in a difficult situation. Our neighbouring countries are in complete disarray,whether it is Pakistan, Bangladesh, Nepal, or Sri Lanka. If there is no strong-willed government at the Centre, our security situation is bound to worsen.

It always sounds good to be optimistic, but unless the people of the country rise to the occasion and analyse the ground level realities without getting carried away by media blitz, and cast there votes, there is a dark period ahead. I hope everybody is listening

The Fll's are selling heavily in the capital market, which is evident in their daily sales figures as given by SEBI. The dollar is appreciating to a new high each day. On the other hand the government in its anxiety to prevent public unrest at the time of elections, is trying to stop the stock market to plummet further by asking Indian institutions to buy in the market.

The writer can be contacted an gopalagarwal@hotmail.com)

 

Indian economy has the potential to bounce back

 Indian economy has the potential to bounce back

By Gopal K Agarwal, 

The global crisis has many lessons for India. On one hand last year's gloom in USA and Europe is dampening our sentiments, on the other hand 2009 can be a year of opportunities for India. Though political stability after the general elections in near future will be a major determining factor.

In the world scenario, the guiding principle of free market economy has lost its charm, people are talking of end of capitalism as a vehicle of economic development. People want the bailout packages by the government; they want the government to use the taxpayers' money to cover up losses of private companies. Many institutions and banks, considered to be the backbone of the financial market, declared bankruptcy and were looking for immediate liquidity. The whole world lost trillions of dollars in capital. Earlier, communism failed costs because people lost faith in the system. Now people have become cynical about capitalism. They have lost faith in banks, stock markets, and debts; their confidence has been completely shaken. 

There are few lessons to be learnt: uncontrollable greed, over leveraging and debt is not good for the economy; putting profit as a motivator over and above people is not a good idea; and living on credit is simply bad lifestyle. The world needs to look beyond the Western powers setting the global economic agenda. 

In this situation, if India can stabilise itself in 2009, it will emerge stronger in 2010 Last year, the focus of the global economy shifted eastwards and Asia emerged as an engine of growth. India has now the potential to be an engine of future growth. The fundamentals of our economy are stronger than is often recognised. India's growth has been based on a sustained rise in the capital formation and gross savings rate as a percentage of GDP. In comparison to this, Western economic development was based on consumerism.

We don't need to focus too much on stock market, which had become too dependent on external factors. The focus of our attention must shift to the real economy India needs growth in its core sectors, especially manufacturing, construction, and agriculture. The slowdown in the export-based sectors and services will have to be balanced. This has been clearly brought out by National Manufacturing Competitiveness Commission. 2009 has to be the year of manufacturing revival in India. We expect the inflation rate to stabilise around 8.0 per cent and GDP to grow between 7 to 8 per cent. This is reasonably good and will bring the desired results.

India's strategy will, of course, have to be based on the assumption that the western countries are not likely to be growth propellant for us. We have to depend on domestic demand, which will sustain our growth. India will be under pressure to liberalise on regional and international scene US and other countries are asking the developing countries not to put up trade barriers and impose customs duties, but they themselves are resorting to all kinds of subsidies. Shri Barack Obama has asked for labour-wage standards to be part of international trade. wherein those countries, which have low wages, will have to bear with import duties in US. Similarly, Indonesia has put import restrictions on 500 items. Russia has put duties on several food items; France is subsidising domestic manufacturing- ing industries. Argentina and Brazil are imposing import duties on food and clothing. The world is preaching liberalisation, but acting differently. India also needs to watch out for its own interests. We need to preserve our domestic market at all costs and take measures to boost our economy.

Keeping this in mind, the government has come out with two packages to stimulate our economic development. In less than a month since the government announced a  Rs 32,000 crore booster dose for the slowing economy, it came out with a more comprehensive and detailed stimulus package valued at over Rs 200000 crore. This second package focuses specifically on stressed sectors such as commercial vehicles, non-banking finance companies, real estate, infrastructure and small and medium businesses.

The Centre has also provided states the leeway to borrow another Rs 30,000 crore. RBI, in a coordinated move with the central government, has also ensured that the interest rates on home, auto and personal loans decline further. Since mid-September 2008, the RBI has reduced repo rate (the rate at which RBI lends to other banks) by 350 basis points from 9 to 5.5 per cent. Reduced the reverse repo rate (the rate at which RBI borrows from banks) by 200 bps from 6 to 4 per cent and CRR (the portion of deposits banks have to keep with RBI) by 400 bps from 9 to 5 per cent. The cumulative amount of liquidity made available to finance system through these measures is over Rs 3,00,000 crore. In future, to ensure this outcome India will have to further continue to invest in education, skill building, rural development and agriculture and in making the infrastructure and manufacturing sectors globally competitive.

One important point to keep in mind is that last year the oil prices were directing and leading the Economic activities. This year the focus will shift to gold. To be on the safe side and reduce risk, the investors should concentrate on wealth management and distribution of their surplus wealth in different asset class and not to keep all their eggs in one basket.

(The writer can be contacted at gopalagarwal@hotmail.com)