What is eating into Indian food basket?

The most powerful person on this planet seems to have got it wrong once again. By assigning the cause of global food price crisis to India, George Bush has again missed the point. The problem, though, is real. Average food prices have risen 45 percent in the past nine months. And just as rising rice prices fueled rice riots and toppled the Japanese government in 1918, today's price hikes now threaten political stability in the global south. A few weeks ago the unrests led to several deaths in Haiti leading to the dismissal of the prime minister. The price hikes have also sparked riots in Egypt, Ethiopia, the Philippines, Cameroon, Burkino Faso, Indonesia, Ivory Coast, Mauritania, Mozambique, and Senegal. According to media reports, many governments are now racing to sign secret bilateral deals with food exporters to secure supplies. The World Bank, U.N. Food and Agriculture Organization (FAO), and International Monetary Fund warned at meetings recently that rising food prices threatened to wipe out a decade of efforts to combat global poverty. Jacques Diouf, the FAO director-general, warned that the social unrest could spread to countries where 50-60 percent of a family's income is spent on food. Most sub-Saharan African countries fall into that category. And the causes are a plenty. Droughts, the Western push to use biofuels made from corn to reduce dependence on fossil fuels, increased demand for meat and dairy products from the richer Asian countries etc. These explanations, however, highlight external causes and ignore causes - rooted in the policy choices of developing world governments - that have led to the stagnation of agricultural sectors. According to Robert Paarlberg, professor of political science at Wellesley College, most of the world's hungry people do not use international food markets, and most of those who use these markets are not hungry. Fact is, international food markets, like international markets for everything else, are used primarily by rich, not the poor. In world corn markets, the biggest importer by far is Japan followed by the European Union. Next come South Korea. Surely, citizens in these countries are not underfed. In the poor countries of Asia, rice is the most important staple, yet most Asian countries import very little rice. Hunger is caused in these countries not by high international food prices, but by local conditions, especially rural poverty linked to low productivity in farming. The focus of this article, however, is more local. India and its botched up agricultural policies. While Bush’s comments made our politicians and policy makers see red, they took the oft beaten track of blaming this on global phenomenon while they continued to ignore the local problems. Not surprising, since every Indian government, past or present, needs to take the blame for the current impasse. India boasts a food grain reserve of over 60 million metric tons but, at the same time, more than 200 million people remain undernourished. Nor surprisingly, the noted economist Prof. M S Swaminathan once commented, “the reason why we have been food sufficient in the past is not that we have produced enough but because a large part of population is undernourished.” How prophetic. Indeed, the numbers speak for itself. First, undernourishment Not only are the rest of the BRIC countries far ahead of India in this count, even, most of the countries experiencing food riots recently are better off. More importantly, most of the countries, which are currently better off than India had a far worse record in earlier periods. Table: Prevalence of undernourishment in total population (%) Country Name 1969-1971 1979-1981 1990-1992 1995-1997 2001-2003 provisional 2002-2004 preliminary Mozambique 58 59 66 58 45 44 Cameroon 27 23 33 34 25 26 Thailand 29 23 30 23 21 22 India 39 38 25 21 20 20 Senegal 23 23 23 25 23 20 Philippines 51 27 26 22 19 18 Viet Nam 32 37 31 23 17 16 Burkina Faso 58 62 21 19 17 15 China 46 30 16 12 12 12 Ghana 24 65 37 18 12 11 Mauritania 53 40 15 11 10 10 Brazil 23 15 12 10 8 7 Malaysia 5 3 3 <2.5> 3 3 Russian Federation 3 3 Source: FAO Second, highly unequal distribution of food This, to a certain extent, explains the undernourishment. India is a country with high inequality in terms of access to food. Although the reference periods vary, the data has ominous signs. In fact, other than Sierra Leone and Liberia, all the countries had a better Gini Coefficient as well as Coefficient of Variation as compared to India. Table: Inequality in access to food Country Name Dietary Energy Consumption Last survey year Gini coefficient (percent) Coefficient of Variation (percent) Sierra Leone 1995 19 a 36 a Liberia 1995 19 a 35 a India 1990 18 34 China 1990 17 32 Viet Nam 1993 17 32 Brazil 1974-1975 17 31 Mozambique 1995 17 a 31 a Philippines 1987 17 31 Burkina Faso 1995 16 a 29 a Mauritania 1988 16 29 Thailand 1990 16 28 Ghana 1992 15 27 Senegal 1995 14 a 26 a Cameroon 1995 14 a 26 a Russian Federation 1993 12 22 Malaysia 1989 12 22 Source: FAO Note: a - estimated

The stagnation

Indeed, the story of Indian agriculture is a story of ill-conceived and, quite often, inappropriate policies. The fact that Indian agriculture has been stagnating for long is quite clear.

The CAGR (compound annual growth rate) of food grain production has fallen from 3.1 percent during the 1980s to a mere 1.1 percent in the 1990s. What is important to note is that this annual growth has been less than the population growth during this period. Till 2006-2007, the situation has hardly improved.

A closer look at the data reveals that the deceleration was much sharper after 1996-97. Since then till 2006-07, the CAGR has been less than one percent. An almost similar trend was visible across major states. Clearly (demand or no demand) the country started facing severe supply side problems since the mid-’90s, which became acute by the turn of the century.

The deceleration, since 1996-97, has been mainly due to sharp decline in usage of critical inputs like technology usage, irrigation, fertiliser and electricity consumption. Not surprisingly, agricultural productivity had been a casualty in India (refer to my previous article, ‘Inflation, who’s to blame’)

Table: Trend growth rate in major agricultural inputs

(%)

Period	1980-81 to 1990-91	1980-91 to 1996-97	1996-97 to 2005-06
Technology a	3.3	2.8	0.0
Gross irrigated area	2.3	2.6	0.5 b
Electricity consumed	14.1	9.4	-0.5 c
NPK use	8.2	2.5	2.3

Source: Economic Survey

a - Yield potential of new varieties of paddy, rapeseed/mustard, groundnut, wheat, maize

b - Upto 2003-04

c - Upto 2004-05

Despite this, our policy makers were content in pointing towards our self-sufficiency in food grains ignoring the fact that the problem had a lot more to do with lack of purchasing power rather than satiated demand. Fact is, when international prices go up, the disposable income of some urban dwellers is squeezed, but most of the actual hunger takes place in the villages and in the countryside, and it persists even when international prices are low.

Government intervention in food grain markets meant primarily for promoting food security has reached a stage where consumers are being deprived of basic food, when a large proportion of the output is diverted from the market to government warehouses. High prices for grains paid to producers, completely ignoring demand-side factors and costs involved in building and holding grain stocks have put them outside the reach of consumers. Stocks are being liquidated by releasing them to private trade for export at a heavy discount. This implies a sort of taxation for domestic consumers.

Urban undernourishment, however, is also a reality. According to the Food Insecurity Atlas of Urban India , brought out by the M.S. Swaminathan Research Foundation (MSSRF) and the World Food Programme (WFP), more than 38 percent of children under the age of three in India's cities and towns are underweight and more than 35 percent of children in urban areas are stunted (shorter than they should be for their age). The report states that the poor in India's burgeoning urban areas do not get the requisite amount of calories or nutrients specified by accepted Indian Council of Medical Research (ICMR) norms and also suggests that absorption and assimilation of food by the urban poor is further impaired by non-food factors such as inadequate sanitation facilities, insufficient housing and woeful access to clean drinking water.

Agricultural investment takes a backseat

Paradoxically, our response has been falling investment in agriculture.

Table: Gross Capital Formation in agriculture (@ 1999-2000 prices

(Rs. Crore)

Period	GCF (total)	GCF (agriculture)	Share of agriculture in total GCF (%)
1999-00	506244	43473	8.6
2000-01	488658	39027	8.0
2001-02	474448	48215	10.2
2002-03	555287	46823	8.4
2003-04	665625	44833	6.7
2004-05	795642	49108	6.2
2005-06	950102	54905	5.8
2006-07	1053323	60762	5.8

Source: Economic Survey

For a country, nearly 70 percent of whose population depends on agriculture and nearly 20 percent of the country’s GDP comes from agriculture, a 5.8 percent share of agriculture in gross capital formation (lowest ever share recorded).is nothing less than criminal.

On the other hand, unable to tackle the problems, our subsidies are growing. So we have a situation wherein measures that can have only short-term impact (read subsidies) have become a regular feature, while investments that can have a long-term impact are losing importance.

Time indeed it is to get our priorities right.

(Kunal Kumar Kundu is the Head of Economic Research at Infosys BPO. The views expressed are his own)

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Northeren Rock: Pulling the plug

The market has said what it thinks of Northern Rock. The British government should listen

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EVERY banker knows John Paul Getty's dictum: “If you owe the bank $100 that's your problem. If you owe the bank $100m, that's the bank's problem.” What then of a bank that owes taxpayers some £24 billion ($49 billion), with another £18 billion or so of deposits underwritten by the public purse? Northern Rock, it seems, is everyone's problem.

The bank, once Britain's fastest-growing mortgage lender, is now a wreck. Having turned to the Bank of England for an emergency bail-out in August, it is unable to repay its loans unaided. Its debt to the central bank is growing. A mortgage book that was the envy of the industry looks less robust by the day. Its share price plummeted this week to less than £1, down from more than £12 at the beginning of the year.

The government finds itself in a deeply unenviable position. It is propping up Northern Rock's liabilities, yet the bank's assets belong to its shareholders. European rules prohibiting state aid to industries require ministers to cut the lifeline by March, or come up with a plausible reason not to. The Treasury is desperately casting around for buyers to take the bank and its problems off official hands, but none of the financial world's best and brightest is willing to assume full responsibility for it. All bidders so far have valued the bank well below even its current market capitalisation; all have asked for public-sector credit lines or loans.

There can be no good ending to this sorry saga, which had its origins in slack supervision, bad central-bank calls and a panic-stricken rescue that left offending bank bosses in charge for too long. But some outcomes are better than others.

Any solution must have two main goals in mind. The first is maintaining the stability of the financial system. For all that the first panic of the credit crunch seems past, there are too many uncertainties abroad to ride rough-shod over fairly fragile sentiment. The second is to get the taxpayer off the hook as fast and as thoroughly as possible. Depositors are protected by the guarantee the government has extended. It is hard not to feel sorry for the 145,000 retail investors who still hold Northern Rock stock; but they are entitled to no such guarantees and they must be aware that share prices go down as well as up.

There are three broad options confronting Alistair Darling, the chancellor of the exchequer, who will, in the end, decide Northern Rock's fate. The first is to sell the bank. The main bidders propose pumping more capital into Northern Rock, organising private lines of credit, repaying part of the government's loan quickly and keeping at least some jobs. Such a deal would annoy the bank's shareholders, who would be bought out for some variation of a pittance; but if Mr Darling could find a private-sector buyer with a firm promise to repay taxpayers quickly, it would be a tidy solution.

The problem is that no such private-sector buyer seems to exist; everybody relies on Mr Darling underwriting the deal for a considerable amount of time. Such a subsidised sale would give the bank's new owners most of the upside, should gains emerge, while leaving the taxpayer with most of the risk, if losses ensued instead. This asymmetry is more than galling: it might well create a perverse incentive for the bank's new owners to gamble even more recklessly than its old ones. And other banks would rightly complain of unfair competition.

A second option is to force the bank into bankruptcy. This too holds few attractions. Deposits would most likely be frozen for weeks or even months. News of savers struggling to get their money back could spark runs on other banks. In the resulting firesale, Northern Rock's assets would probably fetch less than they are worth. And administration would trigger the winding-up of Granite, a vehicle that holds half the bank's mortgages as collateral against bonds issued. If it is liquidated, its cash would be used to pay those bondholders first. Some £7 billion in extra assets that it holds could be tied up for years.

Take it over

This newspaper has, to put it mildly, never been a fan of nationalisation. But with Northern Rock this increasingly looks like the least bad option from a taxpayer's point of view (unless a credible buyer appears). And, in any case, the damage is half-done: in effect the state already owns a chunk of it.

Were the government a distressed-debt hedge fund, it would be trying to assume control, squeeze out existing shareholders and get back the money it is owed. State control, with a view not to running the bank (a terrifying thought) but to running it down, would allow value to be extracted for taxpayers through the orderly sale of assets. Bankers could take some comfort from the government's ability to pace disposals according to the mood of the markets. And nationalisation would let the state retain any future gains by going slowly—or even entering into a private-sector partnership—in the somewhat unlikely event that credit markets, house prices and Northern Rock's reputation recovered soon.

To be sure, nationalisation would be messy. Shareholders might well sue. The lesson from other crises (France, Mexico, Sweden, Japan and so on) is that emergency state ownership should be brief and at arm's length; Mr Darling might meddle, keeping unprofitable parts of the business open to safeguard jobs in the relatively poor (and Labour-voting) north-east. Nevertheless, nationalisation looks the best choice of a bad lot, for it aligns risks and rewards most closely and keeps control in the hands of those who have most invested. But there should be no illusions that it is anything but a mercy killing.

America's vulnerable economy

Recession in America looks increasingly likely. Can booming emerging markets save the world economy?

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market. Experts said that house prices could never fall nationwide. But fall they have, by 5% in the past 12 months. Residential investment has collapsed, but a glut of unsold homes means that prices have much further to drop. Americans' spending is likely to be dented much more by a fall in house prices than it was in 2001 by the stockmarket's collapse. With house prices lower and credit conditions tighter as a result of the subprime crisis, households can no longer borrow against capital gains to support their spending.

Dearer oil is set to squeeze households further (this week's drop in crude prices notwithstanding). Consumer confidence has already fallen sharply. It cannot be long before consumer spending stumbles, which in turn would hurt companies' profits and investment. The weak dollar will boost exports, but at only 12% of GDP, exports are too small to make up for a weakening of consumer spending, which accounts for 70%.

I want to break free

Will an American recession drag the rest of the world down with it? The economies of Europe and Japan rebounded strongly in the third quarter, but look likely to slow down. Although both should be able to keep chugging along, neither is likely to set any great pace. Strengthening currencies will hurt exporters in both places. Europe's own housing hotspots are cooling, and some of its banks have been sideswiped by America's subprime ills.

The best hope that global growth can stay strong lies instead with emerging economies. A decade ago, the thought that so much depended on these crisis-prone places would have been terrifying. Yet thanks largely to economic reforms, their annual growth rate has surged to around 7%. This year they will contribute half of the globe's GDP growth, measured at market exchange rates, over three times as much as America. In the past, emerging economies have often needed bailing out by the rich world. This time they could be the rescuers.

Of course, a recession in America would reduce emerging economies' exports, but they are less vulnerable than they used to be. America's importance as an engine of global growth has been exaggerated. Since 2000 its share of world imports has dropped from 19% to 14%. Its vast current-account deficit has started to shrink, meaning that America is no longer pulling along the rest of the world. Yet growth in emerging economies has quickened, partly thanks to demand at home. In the first half of this year the increase in consumer spending (in actual dollar terms) in China and India added more to global GDP growth than that in America.

Most emerging economies are in healthier shape than ever (see article). They are no longer financially dependent on the rest of the world, but have large foreign-exchange reserves—no less than three-quarters of the global total. Though there are some notable exceptions, most of them have small budget deficits (another change from the past), so they can boost spending to offset weaker exports if need be.

This does not mean emerging economies will grow fast enough to make up for the whole of a fall in America's output. Most of them will slow a bit next year: for instance, China's growth rate may dip to “only” 10%. So global growth will ease—which, after five years at an average of almost 5%, close to its fastest pace ever, it needs to do. But thanks to the vigour of the new titans, it will stay above its 30-year average of 3.5%.

A tale of two prices

The rising importance of the world's new giants will not only boost growth. It will also shift relative prices, notably those of oil and the dollar. And the consequences of this will be less comfortable for developed countries, especially America.

The oil price has risen mainly because of strong demand in emerging economies, which have accounted for as much as four-fifths of the total increase in oil consumption in the past five years. In past American recessions the oil price usually fell. This time it is likely to hold up. That will not only hurt the finances of Western consumers, but may also make the jobs of their central bankers harder, by combining inflationary pressure with economic slowdown.

The enfeebled dollar—lately in sight of $1.50 to the euro—would be weaker still without enormous purchases by central banks in emerging economies. This support is now waning. China and others are putting a smaller share of increases in reserves into the American currency. And Asian and Middle Eastern countries with currencies linked to the dollar are facing rising inflation, but falling American interest rates make it harder to tighten their own monetary policy. They may have to let their currencies rise against the sickly greenback, meaning they will need to buy fewer dollars. More important, as international investors wake up to the relative weakening of America's economic power, they will surely question why they hold the bulk of their wealth in dollars. The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done.

The vigour of emerging economies is good news for the world economy: for its growth, it has much less need of a strong America. The bad news for America is that this, in turn, may mean that the world also has less need of the dollar.

As oil nears $100, look out below

A discussion on the most intriguing topic of today:



Oil prices are soaring. Having jumped 40% since August, crude prices hit another historic high on November 6, rising to $96.70 a barrel. The factors sparking the $2.72 rally this time: bad weather in the North Sea that could force production cuts, the dollar’s continued fall, more violence in the Middle East, and fears that US crude supplies are low. But is there a sharp fall just ahead? Analysts say that the oil market looks overheated, and a number of factors could puncture the price bubble.

Most important, speculators have played a key role in driving up crude prices this year, and if the trend reverses they’ll get out fast. Certainly, global demand remains strong for now. But a number of factors—technical indicators, an economic slowdown, lower demand— could prompt investors to exit en masse. “Oil prices are in uncharted territory,” says Peter Fusaro, co-founder of the Energy Hedge Fund Centre, which tracks commodities hedge funds. “My worry is that if the market tanks, everyone will want out at the same time.

The market would collapse, and who knows what the bottom is.” Much Trading Remains Opaque Speculators have played a growing role in the oil market in recent years. There are 595 hedge funds that are engaged in at least some energy trading now, more than triple the 180 funds involved just three years ago. Fusaro estimates the assets involved in such trading total more than $200 billion, up more than 60% from the beginning of the year. It’s tough to get a firm handle on the speculation.

A large portion of trading takes place in the unregulated, over-thecounter market. Still, some of the trading in crude oil takes place on the New York Mercantile Exchange (NYMEX), and there the market is approaching a record in terms of the number of crude oil contracts that predict a price rise. Traders have committed to 135,000 contracts— each representing 1,000 barrels of crude—betting that prices will continue to rise. That’s just shy of the record 155,000 contracts reached this summer. Some analysts say that if the number of contracts rises sharply, oil prices could fall. “The exit signal for investors could be breaking through the 150,000 or 160,000 contract barrier,” says Joel Fingerman, president of OilAnalytics.net, an energy consulting firm. “At that point investors could feel they’re using all their bullets.”

For Now, It’s Full Steam Ahead In the meantime, however, investment continues to flood the crude oil market, as well as commodities in general. “The mentality now is very bullish,” says Fingerman. “As long as money keeps flowing in, people will keep buying [oil] as though it’s going to go to the moon.” The optimism has helped the stocks of the oil majors. ConocoPhillips is up nearly 40% over the past year. ExxonMobil, Chevron, British Petroleum and Royal Dutch Shell have posted similar if somewhat smaller gains. Still, some analysts say the psychological impact of $100 oil could mark the beginning of a slip in prices. “The professionals will get out of the market at $98.50 or $98.99,” says Peter Beutel, president of the energy risk management firm Cameron Hanover in New Canaan, Conn. “They’re not going to wait for $100 to materialise.” But is there anything special about the $100 mark? Some experts think not. “The barrier was supposedly $70, $80, then $90, and we’re past that. Why would $100 suddenly cause a reversal?” says Stephen Schork, an energy consultant in Villanova, Pa., and editor of the Schork Report, a daily energy newsletter. “$100 is not the death knell to the bull market.”

A Correction Is Inevitable Beutel says that regardless of the exit signal for investors, the oil market is due for a correction. “Historically speaking, we see that every time there is a sustained vertical [price] rise, there is a 20% correction,” says Beutel, adding that the serious threat of a recession could take 40% off oil prices. “It’s a beautiful thing that people forget: The market moves more quickly on the downside than it does on the upside.” It’s also possible that ballooning oil prices will begin to fall when demand responds to price signals, as it happened in the 1980s. “The uptick in crude hasn’t caused the same drag on the economy as it did 28 years ago,” says Ray Carbone, owner of the trading firm Paramount Options. “But once we’re past all-time highs in oil prices, things could change.”

Courtesy: BusinessWeek