US Treasury Yields - Wake Up Call

The Chart below should serve as a wake up call for all those who believe that the World Economy is on the mend. For the past three years, we have been pointing out that the worst is yet to come.

Since 2008, some of us have fondly nurtured the hope that a sustainable recovery is just round the corner. Unfortunately, the world economy seems to be taking the wrong turn all the time. The bond markets think we are far from a sustainable recovery. The US Treasury Yields are lower than they were in 1900 and as low as they were during the depths of the Great Depression. The yields seem to indicate that despite various "pundits" calling bonds a bubble, they are not about to bottom out anytime soon. 

Probably, time the more rational individuals prepare for the worst. But, the good news is that the Central banks have a bit more ammunition left - in the form of QE3 and QE4. It is unlikely that we will see any improvement in the economy in the next three to four years (except for a semblance of recovery with another bout of QE3 and QE4, but they are likely to be temporary. Unless Greece exits the Euro in the next few weeks, we could see a semblance of recovery from early next year, which could last into the winter of 2013. The best thing to do: Conserve cash. 

Rural Indian Economy: Reflections from the Field

A visit into the rural regions of Andhra Pradesh leaves the impression of a society and economy that is in the throes of change. However, the pace of change seems to universally underestimated. Little wonder that, events that grab the headlines "suddenly" always seem to confound our middle class, liberal sensibilities.

Two interesting underlying  trends seem to be underway in Rural Andhra Pradesh: (a) Mechanisation of Agriculture is gathering momentum at a previously unheard of pace, and (b) Technological adoption has spread to even the remote villages. This technology adoption is quite widespread in all the small towns. 

The small towns, though are still quite enamoured with "computer", "hitech", etc. The picture below is that of a e-seva Kendra in Kandukur, Ranga Reddy District, which advertises, the computerised bus pass service as some sort of niche service that they offer.  

The growing emphasis on mechanisation of agriculture is even more interesting. The case of Mahabubnagar district and Kalwakurthy Mandal in the district is illustrative of this trend. The Mandal is considered to be "backward" by AP standards. There five different show rooms (of different companies) that sell tractors and other farm equipment. This year, till date, the business volumes have been far below expectations due to the drought conditions. Sales have been only 20% of the expected sales. The sale of harvesters, in the district, is quite brisk and if the monsoons are good (normal or above normal) they are likely to grow faster than the past few years because a number of farmers have embraced technology in order to reduce labour costs. None of the companies display harvesters, but will accept order for the same, which will be sourced from their showrooms in Mahabubnagar town. Each harvester costs about Rs.16 lakhs and the banks (or hire-purchase firms) finance at least Rs.10 lakhs. The maintenance costs for an harvester average about Rs.500 per acre. The cost charged for those who hire a harvester vary from Rs.1200 to Rs.1800 depending on the demand. An acre of land takes about one hour to be harvested. As a generalisation but subject to normal monsoons, the loan for an harvester is repaid in about 2 years, implying earnings to that extent from hiring the same to other landowners. Interestingly, the larger the landholding of the buyer, the less the initial cash down payment required. In the case of tractors, if the prospective buyer possesses less than four acres, they are expected to cough up 50%. Land ownership of more than 10 acres mean cash margin requirement at about 25-30%. 

This year, the demand for hiring harvester has slumped in the district and the neighbouring districts, hence the owners have sent to the coastal districts of AP, thereby reducing their margins. One dealer rued that in such times, the drivers demand up to Rs.15,000 plus the fact that there is no easy way to monitor how much the driver actually harvest. The downside of harvesting paddy with these machines is that the farmer often loses the hay as it becomes unfit for milch animal consumption. Thus, the growing adoption of this technology will invariably have an unintended consequences: shortage of hay will have an impact on milk production and with it the cost of milk in the next few year. Add to this growing population and it may be a good idea as to why the price of milk is not about to decline in a hurry.

 

An aspect of rural economy that cannot be missed is the widespread prevalence of pyramid schemes and shady investment companies - often registered as Agro Farms or Real Estate companies. These companies often masquerade as those involved in selling plots of land/houses or house sites in projects that are in various stages of completion. In reality, they are entities that collect deposits (always in contravention of RBI guidelines), mostly from shops or from those Below the Poverty line.

In a number of villages, Sahara India often markets its products as a "safe" alternative to deposits in the banking sector. It is present in almost all the towns which have a population of less than 10,000. One such office is in Kalwakurthy (picture below). Interestingly, their offices have a knack of being closed at any point of the day yet their agents collect lakhs in deposits every month. 

The Other side:

It would be a mistake to believe that merely because process of change is underway in earnest, the momentum will take it forward unhindered. What should be unsettling for the policymakers is that the risk of rural economy grinding to a halt is real and lurks just below the surface. Till date, the bull market in commodities has often been mistaken for brilliant policy making. The unprecedented phase of economic growth has been largely wasted. Instead of setting their balance sheets right, governments, corporations and individuals have used the boom to exponentially increase their leverage, often with the mistaken impression that trees grow to the sky. That unfortunately is about to change. Considering the fact that, India may either be headed for years of stagflation or into a phase that is eerily similar to 1996-1998 conditions increased leverage is an change that we are likely to regret for years to come. [Personally, I would bet on the latter than the former, but global factors could swing the scales. A deflationary spiral in Europe and China would send us into a 1996-98 type downward spiral, while stagflation will take hold if the World Economy were to chug along in the present manner].

What could upset the process of  rural change that is underway?

• Top of the list is the failure of monsoons - possible and we will not know till it is too late. Unfortunately, we cannot depend on the Met Department: their best guess-estimates of normal are always abnormal for the real world and are too vague to even think about depending on them other than to provide temporary solace.
• Rural house construction has come to a standstill in a number of regions. This seems to be for two reasons: the shortage of sand (due to High Court ban - see what happens when you follow the rules in India) and the lack of surplus cash. The banks have their own problems are not interested in lending - with or without Priority Sector Status. It has nothing to do with high interest rates in the rural areas, where the standard interest rate that people pay is at least 24% per month. Hence, 15% for a housing loan compared to 12% a few years back is not a major factor.
• Fall in agricultural commodity prices - a process that is underway
• Drying up of institutional credit - a process that is underway. 
• Water availability -  The present drought conditions are already having an effect.

NOTE: The above mentioned rural change is based on observations in parts of Rural Andhra Pradesh, especially Kurnool and Mahabubnagar districts.

Rural India: Are We Underestimating the Pace of Change?

In India, the Utopian image of an idyllic rural community untouched by change has occupied the centre stage of various discourses for a variety of reasons. A recent central thematic concern has been the problems that Indian  agriculture faces including its inability and lack of profitability. This lack of profitability has created numerous hurdles that dis-incentivise change - like investing in technology, etc. The reasons cited vary from (in order of precedence) small size/uneconomic size of holdings, lack of credit, rising cost of inputs (favourite whipping target: NREGA) and a host of complex issues (that often confuse any observer). Conventional wisdom is all encompassing and those who refuse to conform to the consensus do so at great risk. 

Historically, the consensus has been very often wrong in predicting the nature of economic (and the attendant social) change in Indian agriculture. This may be about to happen again. A remarkable feature of the rural landscape over the past two years is the increased visibility of machines in the fields. Interestingly, these machines dot the landscape of not only the more prosperous regions of the country but also the supposedly more ''backward'' regions. In Andhra Pradesh, a visit through the rural areas shows the increased presence of these machines. Ironically, the growing spread of the use of the machines seems to fly against another conventional claim that they can be profitable only when deployed in large sized holdings - implicitly a view that backs large scale "corporatisation of agriculture". While profitability is always a relative calculation, the fact that even small sized holdings in rural Andhra Pradesh prefer to deploy machines (as in the picture below) indicates that we may be underestimating the pace of change in rural India. 

The picture from Medipoor Village of Mahabubnagar District is illustrative. Harvesters are now used in small holdings (often to harvest paddy in less than 1 acre). The picture is significant of a trend for the simple reason that Mahabubnagar is considered to be one of the poorest regions of AP. The size of holdings where the harvester has been deployed is mostly less than 2 acres. 

What is often missed is that it not the uneconomic size of holdings that primarily hinders investing in agriculture or introduction of new practices. It is often the inability of the small and marginal producers to navigate volatility in a financialised, globalised electronic market place. Unfortunately, precious little is being done to help the small producers to navigate price volatility and information asymmetry that pervades through out rural India.

Probably, change may be closer to Rural Society and Economy than we would like to believe.