Mechanisation of Agriculture: Insufficient understanding of its Impact?

An often but extremely interesting facet of rural socio-economic life (at least in AP) is the increased mechanisation of agriculture. A clearly discernible, albeit recent appearance in agricutlure is the mechanical harvesters. They increasingly dot the rural landscape. Since May 2012,when we first pointed out this trend, their use has increased exponentially. Each harvester costs Rs.1.4 million to Rs.1.6 million with a prospective owner investing about Rs.500,000 to Rs.600,000.

The rapid use mechanical harvesters has very interesting consequences, most of which do not seem to be well understood. Some of these issues are highlighted below:

Firstly, A number of these harvesters are operated in a manner similar to the lorry business. 

Secondly (most important but often overlooked), it reduces the time cycle for the farmer - they now facilitate completion of harvesting about one month earlier than in the past; 

Thirdly (at least in AP) there is an increased adoption of the harvesters in dry regions of the State rather than in the more irrigated (and more prosperous regions). In these dry regions, labour costs are lower but, there is greater investment in mechanised harvester - mostly to operate as a business rather than for own use. 

Fourthly, their use saves substantail amount of money to the land owner: they harvest about one acre in one hour and the cost varies from Rs.1200 to Rs.2500 (depending on the demand). 

And, Lastly, Needless to say, nobody seems to knows its impact on the rural labour markets, other than the conventional stereotype that mechnaisation leads to job losses. 

Time for a rethink?

Fighting Food Inflation in India: Attempting the Impossible?

Almost everybody claims that they are worried about inflation. It is likely to be a major issue in the forthcoming election in 2014. But, there are not many satisfactory explanation for where the demand is coming from, especially food inflation. 

1. There is an increase in money that people are earning and money that people are accessing by assuming new debts or through remittances. 

2. Wages are up, so is the Minimum Support Price (MSP) for various agricultural commodity prices is up so there is some increase in inflation that is bound to increase - everybody knows that. 

3. Oil prices are up - everybody knows that. 

4. High levels of consumer lending by the banks. 

5. What may be missed is that over the past few years there is a huge amount of money that is going directly into the hands of lower half of the population, if not lower quartile. Undoubtedly, one of the important items that the lower middle classes and the poor do is to spend a lion's share of their earning on daily household expenditure and items like housing, debt repayment and education. A large part of their daily household expenditure is going into food. Where are people getting so much money to spend ever increasing amounts on food:

(a) There is a large number of money flowing in through Remittances from other countries - nearly $60 billion (at present value: Rs.360,000 crores) flowing into India through formal channels. Assuming that at last another US$10 billion comes through hawala route (i think it could be double that). Hence, the total money flowing in through remittances could be in the region of Rs.500,000 crores annually. There is a major correlation between increasing remittances and rising food inflation since most of the money goes into funding expenditure related to daily needs, education or housing. There are whole villages where large sections live on remittances. 

(b) Internal Remittances - unknown amount but since that is a consequence of rising wages, we know it is already factored into present day thinking.  

(c) Borrowings by the lower middle classes and those below poverty line: There is a sharp jump in lending through SHGs and MFIs. Interestingly, both these have jumped over the past three years - years when inflation, especially food inflation has gone up. MFIs have ramped up lending over the past two years in other parts of India. Assuming that together (govt supported SHGs and MFIs) have lent Rs.50,000 crores it is quite high. Our studies indicate that most of these borrowings go into consumption loans. 

(d) Add to the above list loans by Gold Loan companies: wheret 30-40% of the gold loans may be to the poor earning less than Rs.100,000 (about US$1500) a year. Assuming that they have combined portfolio of Rs.100,000 crores and 40% is to the poor, then it would add another 40,000 crores. 

(e) Money from informal lenders - we have no idea about how much is going to the lower sections. So best leave it. 

(f) Add to this some welfare programmes like NREGA which is again directly flowing into the hands of the poor, who are most likely to be spending the monies within a week of receiving it. 

(g) Add to this other borrowings by the bottom 50% of the populace - a lot of which may be going back to purchase food and other daily needs. 

To these may be added other supply side factors and also the whole issue about land use and a new addition - export of food grains. 

In other words, there is about Rs.500,000 crores (more than US$79 billion) of "new" money that is chasing food items and most of this is invisible on the policy makers radar - at least till now. I think they are highly correlated to periods of rising food inflation. This is what i am assuming. Considering that i am usually very conservative when making an estimate (because i would like to err on the side of caution), it is bound to be far higher. Assuming that my estimate is correct it is still large. 

The point that we are trying to underscore is that people now have a lot more money in their hands, due to a variety of reasons. This is money that is going directly into the hands of those who are more likely to spend it immediately - and on food. In contrast, the remedial measures are geared at monetary policy, which take a long time to feed through to the system (say 6-9 months). Hence, the solution that is being tried out by the the Reserve Bank of India (monetary policy related) is not exactly very useful. Therefore, there is a need to reclabirate policy on the part of the Central Government and the RBI. Therefore, liquidity tightening may have only a limited role or even an adverse impact in controlling inflation because the underlying dynamics may not be working as well as they did in the past.  

Question worth Reflecting

Over the past few months there is a greater visibility of business establishments (picture below). This raises an important:

What is that people are more interested in - buy gold jewellery or borrow money?

In every city (the above picture is from Hyderabad), town or large villages shops selling jewellery and lending money against gold are increasingly visible. Five years back it was only registered pawnbrokers who offered such services. Now, we have banks, NBFCs, pawnbrokers, jewellery shops, and informal moneylenders offering gold loans. This leads to another question: Are people more desperate to borrow now than they were five years ago or is simply financialisation of commodities spreading to different parts and different segments of the economy?  

Boom, Bad Loans in Banking Sector and Valuation Model

At last, banking policy makers have realised the damage that bad debts have wrecked to the Public Sector Banks. Recently, a senior RBI official lamented that Corporate Debt Restructuring (CDR) for loans is 'going out of control' gone out of hand though they were under control till March 2011. The official pointed out that banks restructured accounts touched a massive Rs.3.25 lakh crores (approximately US$50 billion) - nearly Rs.2.7 lakh crores is through CDR. Belatedly, RBI has warned about the problem of over-indebtedness and directed the banks to make larger provisions. Other senior RBI officials have pointed out that more than 12% of the banking system's advances have turned bad, restructured twice or written off on technical definition. The official blamed this on poor credit appraisal systems. What was not mentioned is that the problem of bad loans is primarily grounded in cronyism - a phenomenon that grew exponentially over the past decade.  

Since at least January 2012, this blog has drawn attention to this problem with what was frowned by a few readers as boringly monotonous. We drew attention to the problems in different segments of the economy, especially the government and the corporate sector. Another facet of the economy that we drew attention to is the eerie similarities to 1996-98 period: the only difference is that the present size of the economy is much larger and by corollary, so are the problems. An overview of the causes for the growth may serve as a good entry point. We argue that the boom was caused largely by government spending, assuming debts and remittances. Each of these triggered a jump in land values, which only fueled the boom. 

Thought debatable, we may assume that the foundations for the boom were in the changes that took place between 2002-05. The good monsoons in 2004 and increased spending by the government triggered the boom. The total bank credit (on 19 March 2004) was Rs.7,64,383 crores. By 1 November 2013, total non food credit grew to about Rs.55,588,600 crores. In 2004 worker remittances from overseas into India were estimated at US$23 billion. By 2012, this had risen to about US$69 billion. The impact of such large money flows into the country can easily understood. Most of it went into chasing few assets including those in the stock markets. 

As more money flooded into the stock market and other commodity markets, a process that was underway in other parts of the globe, there was increased importance to a 'valuation model' - where capital appreciation was more important than incomes that could be earned through investment in the companies. Valuations improved with the perceived ability to collect rents through squatting. Squatting on resources meant higher valuations, which in turn could lead to companies being sold without investing any capital (other than for grabbing the resource). The only places where such money could be raised was by raiding the banks through crony connections)  that would enable an improvement in the valuations - a cause for many scams. The hurry to corner resources spread to the 'older' parts of the economy (coal, power, hydro, roads, etc) and to the 'newer' parts (telecom spectrum, digital gateways in the banking system, payment systems, etc). The ability to collect rents and easy money led to a rush to garner resources, thereby increasing the need to deploy larger sums of money to corner the resource. 

This brings to forefront the road ahead for the regulators. Identifying and accepting the nature of the problem is the easy part. Dealing with it is more difficult simply because they will have to overcome vested interests. Unless, these vested interests, most of which are intertwined with the rulers, are overcome policy tweaking may be too little, too late. 

If history, a guide, expect a big bail out for the indebted crony elite, which passes off as genuine businesses. 

Technology and Rural Banking: Pictorial Explanation

"Banking" on Liquor?

Sign of Change or changing nature of socio-economic dynamics? There seems to be no turning back on the importance of liquor in everyday life.

The photo is from Anantapur District of Andhra Pradesh

Innovative Country Cousin of KFC?

There is never a shortage of innovation in Small Towns, especially when it comes to names. ATM can mean a lot of things to different people in various sectors. The banks would like to believe it is "Automatic Teller Machines" while customer would like to believe it is "Any Time Money". In some small towns (like Vijayawada and Kalwakurthy) ATM can also mean "Any Time Milk".

This interesting fast food restaurant in Vijayawada calls itself "Most Favourite Chicken". Probably would like to comfort its customers that it is as good (exterior looks and interior ambiance) as the better known multinational company. The multinational itself can do nothing to complain. 

Gold, Government Policy: Need for a reality check

In recent weeks, India has witnessed an interesting debate and policy interventions aimed at reducing the import of gold bullion in different forms. These measures are a continuation of the attempt to increase tax on gold inaugurated in the Budget of 2012. In the past few weeks, there have been a series of measures aimed at restricting the banks from lending for such purchases, restricting imports from people returning/visiting India and tweaking of other policies. Innumerable statements that seek to encourage gold owners to embrace electronic and other gold instruments are the order of the day. Invariably, these measures triggered a debate in the press about the reasons and efficacy of such measures.

The estimates about the quantum of the gold available within the country varies from 18000 tonnes to 20,000 tonnes, excluding the amount of gold held by temples. It is almost impossible to accurately estimate the quantum of gold available within the country. Imports are reported to have doubled since 2011. The rise in prices have only added to the attraction of gold. A clearly discernbile trend in India is the fact that millions of people are buying very small quantities, often no more than 1 to 10 grams at a time.

At the outset, it is imperative to underscore that a large part of these measures, however justified are hasty. These measures are hasty keeping the peculiarities of the socio-economic structure of India - even ignoring the cultural significance attached to owning gold in India. A number of articles have drawn attention to the need for a more efficient use of the huge amounts of gold already available in the country. Owning gold has not only cultural significance but also practical uses - probably far beyond what the government would like to accept. 

The response of the government has been remarkable insensitive to the needs of the people. Government seems to think that increasing import duties will help temper the demand for gold and give a fillip to the use of  existing gold hoard since most of the gold is anyway stashed away or in the form of jewellery. Unfortunately, this wishful thinking is unlikely to help either the government or the consumers. The only group that gains are the smugglers because any differential in the price of gold in the international and national markets will only lead to the opening of yet another profitable business. 

Electronic gold and related instruments have only a limited appeal. They require people to actively trade/invest on the stock exchanges. India has relatively few investors as a percentage of its population. Opening and Operating Demat accounts continues to be cumbersome as well as expensive, especially when holdings are of low value and volume. A more pertinent reason why gold and related electronic instruments are unlikely to succeed are due to reasons related to trust and problems in the dispute resolution mechanism. It is less risk to actually physically hold gold rather than place it with a formal institution or depend on brokerage houses and attempt redressal for fraud or litigation that springs up due to other reasons. 

Policy makers have to realise that in India gold is not only credit but as good as cash in hand in for the millions of people. Though, people like Warren Buffett may not have any use for gold; but, throughout India one can raise cash literally in the middle of the night by pledging gold. (Buffett is reported to have stated: "Gold get dug out of the ground in Africa, or someplace, then we melt it down, dig another hold, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head"). Apparently from Omaha the view from Mars is quite twisted. In the poorer parts of the developing world, gold is probably one of the most liquid assets and a more transparent asset class to own: even the poorest can compute their rise or fall in value everyday. They are more liquid than stocks even in the remote regions and more transparent opaque real estate market. Moreover there are very few markets accessible where people can invest relatively small amounts. Little wonder that all parts of the gold business - physical sales to lending against gold are booming business segments that has drawn even the largest players. Gold loan business is estimated to be worth Rs.300,000 crores per annum with about 2/3rd being informal in nature. 

The rise in gold price and thanks to the increased investments have single-handedly helped the poor improve their 'creditability' among the banks and pawnbrokers far beyond what government policy has achieved over the past decade. In such a scenario there is a need for the government to reconsider its suspicion (or even hostility) to purchase of gold.

Time for the finance minster to take a visit beyond the metros?

The picture below of a Pawn Broker from a village in Chitoor District