Some alternatives to MSP: Financial Express 27th Feb 2024

 The MSP issue has always been contentious. Initially, the idea was to have such a scheme because the government needed to distribute rice and wheat under the PDS or public distribution system, but this spread to other crops too where there was no backend procurement. These prices were indicative at best. 

Over time, a few developments have taken place. First, the support price, which was to be the last recourse, became the first choice for farmers. Second, as the MSP was an average fair quality, many farmers automatically chose this standard and did not migrate to higher value qualities, as there was no such backstop provided. Third, farmers ended up producing more rice and wheat because of the procurement, which meant that crop diversification was not favoured, even when there were cost advantages. Fourth, the MSPs for crops which were not procured became benchmarks in the market and hence even when there were, say, higher supplies, prices did not come down in case MSPs increased substantially, as has been the case with pulses and oilseeds. 

Fifth, food inflation will always exist, as MSPs have been increased every year by an average of 2-6% for crops. This would not be a concern under normal conditions. But the RBI is targeting 4% inflation, which has been pressurised due to food inflation. It will always tend to be a threat, even if production is normal. Sixth, as a result of this scheme, real price discovery never occurs, as this extraneous factor is always at play. The last unintended fall-out is that it is hard to bring about any reforms in this sector. In fact, several progressive developments have gotten thwarted on the marketing side.

The MSP is based on a cost-plus formula, where the CACP takes a call based on predefined ways of defining costs. Post the 1991 reforms, there has been no other sector in the country which is as regulated as agriculture. The reason is not hard to guess. While the ministry of agriculture works to improve the income of farmers, the ministry of consumer affairs has to ensure that the consumer does not pay more than a fair price, which is quite a subjective concept. This then permeates to other areas such as foreign trade as well as the domestic trading chain, which creates anomalies. When there are shortages, there are embargoes on exports, as was seen in case of wheat, which militated against farmers. At times when there are shortages, there are open market sales, which not just lowers retail prices but also mandi prices. Further, putting stock limits on holdings at the retail and wholesale levels distorts the picture further, as traders are impeded. All crops are grown annually and have to be stored by some entity to be made available through the year. But traders run the risk of being found guilty when prices rise. 

There is evidently a need for a significant overhaul, as small changes have not had much of an impact. First, the cooperative movement needs to be encouraged so that a self-service model is built. The milk story is a stellar example of how success was attained by including all farmers. It has delivered quality, quantity, and price changes unobtrusively. Second, there is a case for making agriculture a state subject. Presently, there are excessive subsidies which are given as handouts, distorting the incentive structure at the end of production. The states and the Centre often compete here, and the way out is for states to get into the act of running agriculture. This has the potential to provide incomes to farmers and will also allow the market system work. Third, the entire process of ‘free food’ should be outsourced to states. They should procure it and get compensation from the Centre where it is done from the closest markets. This will save a lot on logistics and handling costs. 

Fourth, the derivative markets in commodities where NCDEX is a frontrunner, followed by MCX, should be used to replace MSP. An option gives the right but not the obligation for farmers to go with the price they have contracted in return for a premium that is paid. The government can only subsidise the option premium. If the price is higher, the farmer sells on the exchange. Delivery need not be taken or given, but the price risk can be hedged. The Farmer Producer Organisations can be entrusted with the task of representing the farmers on the exchanges. Sebi, along with the exchanges, has already done a lot here, and this needs to be taken to a logical end. Lastly, contract farming and corporate farming having enabling frameworks with checks are also essential to transform agriculture. This has worked very well in countries like Brazil, Mexico, Ghana, Turkey, and China, besides many smaller agri-based economies. 

Some baby steps have been taken in this regard, like the setting up of a spot market called eNAM. Model APMC laws have been passed by some states to open up sales. This was all part of the farm laws introduced but withdrawn under protest. We really need to ask a broader question on whether we really want a strong, independent and resilient farming structure where farmers at all levels and not just the larger ones have access to a high-income-sustained living. There is a need for change and this is the right time.

Giving Options To Farmers, The Practical Way Out: Free Press Journal 17th February 2024

 Agriculture is probably the most delicate subject when looking at economic policy in India. This is so because there are several conflicting stakeholders involved. At one end of the spectrum are the farmers who do the production of all goods and services in the sector and are on the lookout for the maximum possible return. At the other end is the consumer who wants to pay a fair price which is also the lowest one. And in between is the central bank which has to manage monetary policy which is driven by inflation targeting which in turn has little control over the direction of food prices.

It is against this background that one must look at the protests of the farmers closer to Delhi where the main demand is to have the Minimum Support Prices policy made into a law. It may be recollected that when the farm laws were introduced, only to be withdrawn, almost three years ago, the major concern was that with markets opening up the MSP would be withdrawn. Assurances were given that MSP would never be withdrawn. The demand now is that it be made into a law where prices of 23 commodities are covered.

How does the MSP work? Before the sowing starts in the two seasons of kharif and rabi, the Ministry of Agriculture announces the minimum support price that will be paid to the farmer for various crops. The idea is to provide a backstop facility in case prices crash at the time of harvest. There is economic rationale here. However, the government normally has procurement policies for rice and wheat where these stocks are linked to the Public Distribution Scheme. Today with the free-food scheme being guaranteed for the next five years, procuring rice and wheat is an imperative. However, for other crops there is no such compulsion and hence the MSP is at best an indicative price for the farmers. Farmers can decide on which crop to grow based on these prices, but cannot be sure that there will be a buyer in most cases. At times states do procure pulses and oilseeds through cooperatives, but this is more of an exception than rule.

Now by making this scheme a law it would mean that the government would have to keep increasing the prices of all crops and have provisions to procure the same if warranted. Today, besides rice and wheat, for other crops the MSP sets benchmarks in the market at times and hence can elevate prices even if supplies are good, thus leading to inflation that may not be justified due to market forces. In fact the MSPs are increased by 4-6% on an average based on a formula which looks at all costs and a margin on the same. It is unlikely that this will change.

The other demands of the farmers include increasing the number of days under NREGA to 200, raising the minimum wage to Rs 700/day, pensions for those above 60 years to Rs 10,000 per month and so on. Also making the MSP a law would mean that it would be mandatory to announce and procure all the crops which is not feasible. This would also translate to higher cost for the government which is trying to lower the deficit. Further, the threat of increasing inflation that is not linked with supply or demand conditions would distort commodity markets. The RBI will have a difficult time in viewing inflation and adjusting interest rates in case higher prices get embedded every year due to the MSP.

The major challenge to policy formulation in India especially agriculture is that once introduced it becomes very hard to withdraw any scheme or even consider a rollback. It is true that agriculture is in a hard spot. On one hand higher prices are not looked positively when inflation is high and there are trade embargoes applied which affect farmer incomes. Here the aim is to protect the consumer from higher prices. At the same time increasing MSPs has become an imperative to assuage the interests of the farmers.

Now the MSP was a tool to influence farmers to also alter their cropping pattern and hence bring about a diversified structure. However, as the cost of growing rice and wheat was the lowest relative to crops like pulses or oilseeds where there was also risk of crop failure due to uneven monsoon patterns, there was a tendency to grow more of these two crops. Rice and wheat along with sugarcane (which also has a mandatory procurement price for mills) use the maximum amount of water which has led to the water table levels coming down especially in the northern states. This is because selling to the FCI has become the first option for the farmers rather than the last recourse, which is what it was supposed to be. Also the farmers have not migrated to higher varieties of cereals because the existing structures worked well. Further, the fear of ban on exports was another deterrent for not moving up the value chain and settling for the average fair quality.

The issue is evidently complex but not without solution. The markets in all segments have opened up considerably but agriculture remains untouched mainly due to conflicting interests of various stakeholders. Opening up the markets is the only solution and providing options to farmers is the practical way out. By controlling prices, there is an inherent tendency to support either the consumer or farmers thus making the market process of price determination quite distorted. This ideology has to be sorted out at the government level.

Has the investment cycle of our economy turned up at last? Mint 13th Feb 2024

 

The silent fiscal innovation: The government’s gross borrowing projection for FY25 has triggered a fall in yields Financial Express 6th Feb 2024

 

The 10-year bond yield was around 7.14% on the eve of the presentation of the interim Budget. Once it was presented, it fell by around 8 bps, and market experts believe this will be the new range for the paper.

The efficient markets hypothesis states that if all participants have access to all the information related to the price of the subject and thus take rational decisions accordingly, the price discovered in the market will be the most efficient one. Though used generally in the context of stock prices, this also holds true for bonds where price/yields are market determined.

The 10-year bond yield was around 7.14% on the eve of the presentation of the interim Budget. Once it was presented, it fell by around 8 bps, and market experts believe this will be the new range for the paper. Add to this the fact that a new 10-year benchmark is to be announced, as the outstanding limit for the existing bond has crossed Rs 1.5 trillion. There is added pressure in the downward direction.

The reason is that every time a new benchmark is announced by the Reserve Bank of India (RBI), yields usually come down by 3-5 bps. Therefore, there would be a natural instinct for a further decline in the yields once this is announced. A level of less than 7% is not being ruled out. But why did the interim budget have such a deep impact?

The interim Budget for FY25 projects a lower fiscal deficit ratio—5.1% of the GDP—with only a marginal decline in the net borrowing programme of the government (Rs 11.75 trillion projected against the Rs 11.80 trillion in both FY23 and FY24). But the market is more interested in the gross borrowing programme of the government, which is projected to be lower, at Rs 14.13 trillion as against Rs 15.43 trillion in FY24.

This was the main trigger for the decline in bond yields, besides the headline fiscal deficit ratio being lower. The market always gets perked up when there is knowledge that there will be less borrowing from the market even though it is for the coming fiscal year. The difference between the gross and net numbers are the redemptions, which are estimated to be Rs 3.61 trillion. In this case, the gross borrowing should have been Rs 15.36 trillion—almost the same as FY24’s. But it has turned out to be lower for a specific reason.

The lower gross borrowing programme is due to the transfer of Rs 1.23 trillion from the GST compensation fund towards these repayments. This is probably the first time that repayments have been made from a source other than fresh borrowings. This has lowered the pressure on the market.

The GST compensation fund, it may be pointed out, was created to compensate states for any shortfall in revenues from the pre-assigned growth rate of 14%, but was to expire in five years. This was used and exhausted during Covid, when there was a fall in GST collections.

Now that the revenue raised has increased substantially over the last two years, there is enough buffer left, which has been used in both FY24 and FY25. Interestingly, for FY24, too, there was a recovery of Rs 78,104 crore from this fund, directed towards redemptions. In a way, this method has been a gift to the markets as it has brought down yields and raised prices.

The financial system has been in an unrelenting deficit over the last two months, with the RBI providing funds through the variable repo rate (VRR) auctions on a periodic basis. This was reflected at the lower end of the tenure while the 10-year yield was driven more by sentiment.

Hence, statements made by the Federal Reserve tended to influence this bond; and ever since the Fed indicated that there would be no more rate hikes, there has been a downward tendency. The spread between the US and Indian 10-year bond has now come within the 300 bps range. Lower yields are always good for the banking system as it will help to book treasury gains by the end of the year. However, it needs to be seen whether or not the lower end of the spectrum would also witness the softening of yields.

The interesting fallout here is that the treasury management in the interim Budget has been very cogent, where innovative techniques are used for managing funding. Instead of letting resources lie in the reserves, these have been used for repaying debt. This gives an idea that all such avenues need to be explored as the government works towards lowering the fiscal deficit even further, towards its targeted level.

This is also the time when the economy is expected to keep growing at an accelerated pace, thus necessitating higher demand for funds by the private sector. By keeping the gross borrowing programme under check, not only are more funds available to banks, but bond yields are lowered as well. Therefore, treasury management will become more important going forward. In fact, the states too could be taking a hint here to explore if such opportunities do exist for moderating the pressure on their budgets.

It can be seen that the government has been using various innovative methods that go beyond the conventional raising of tax revenue, which is dependent on the state of the economy. Asset monetisation is another such idea which has a very strong potential, as it not only brings in funds but also adds dynamism to the financial markets. A fast-growing economy requires such measures to be taken continuously to ensure a smooth transition to this high growth path.

Analysis: The Immense Potential Of The Ayodhya Economy: Free Press Journal 3rd Feb 2024

 

Religious tourism has greater significance in India as faith brings in more visitors than leisure travellers

The Lord Ram temple in Ayodhya, the ultimate symbol of Hindu faith, will bring in myriads of worshippers to the town and in course of time put it in the league of other religious destinations. The potential to create a new economy is immense as structures develop to meet the demand. Can these outcomes be conjectured?

As per data reported in Indian Express, Ayodhya’ s economic size is less than 1% of that of Uttar Pradesh at around Rs 11,000 cr for FY22. The per capita income in Ayodhya was around Rs 57,000 that is lower than that of the state which was around Rs 93,000. For the country as a whole it was around Rs 1.48 lakhs. It accounted for 1.2% of UP’s population in 2011 while the urbanisation ratio was just over 14%. Per capita electricity consumption at 148 KWh was lower than state average of 291 KWh and national average of 1255 KWh in 2021-22.

However there has been a lot of focus on delivery of public services in the last few years and the ratio of LPG consumers per lakh of population was 20,236 compared with the state average of 18,309. Similarly, the length of pucca roads to 1 lakh population was higher at 181 kms relative to the state average of 147. Clearly in the run up to the great event, there has been a push given to development which has been taken on by the local authorities.

Now that the holy temple has been consecrated and opened to the public, one can see exponential development taking place to keep pace with the influx of tourists. Temples in Thirupathi and Banaras get around 50 mn tourists every year while Hardwar and Char Dham pilgrims would cross 5 mn each. Mathura which is associated with the birth of Lord Krishna gets in around 5 mn tourists every year. Goa, which is more for general tourism, gets in around 10 mn a year. Himachal state gets around 10 mn visitors every year. Quite clearly religious tourism has greater significance in India as faith brings in more visitors than leisure travellers.

Given the religious significance of the Lord Ram temple and the interest of myriads of devotees to visit the temple to seek blessings, it can be assumed that there will be rapid development across the board. As far as private interest is concerned, the prime area would be hospitality. The cost of building a hotel, depending on the quality can range from Rs 35 lakhs to Rs 2 crore per room key. Hence a hotel with 100 rooms would involve a fixed cost of Rs 35-200 crores. This would include structures, furniture, amenities like lighting, etc. Assuming that there would be a series of hotels coming up to begin with across different cost structures, the investment potential is high for sure.

Second with religious tourism rising and hotels coming up, the hospitality sector is bound to witness an increase in employment. This is a corollary as hotels and restaurants will be hiring both blue and white collared workers to run these establishments. The grandeur and significance of the Lord’s temple will attract a continuous stream of tourists that have to be served on a real time basis.

Third, as already seen, construction will receive another boost. This will include both the infrastructure development in terms of more roads and bridges being constructed but also residential buildings. Once a place becomes a hub for any activity there is a case of evolution of other construction sectors that will add to the district growth. While Ayodhya per se may not really witness the backward linkages which would accrue to the adjoining regions which supply construction material, the proliferation of retail outlets for the same would increase.

Fourth, development of any region leads to the proliferation of financial services and hence there will be more branches and ATMs opened for sure. Presently there are 178 branches with deposits of just over Rs 17,000 cr. There is scope for substantial increase in business and all banks will be keen to have a presence closer to the temple.

Fifth, FMCG companies could be sensing an opportunity to set up shop and here the onus is on the state to provide the right environment as the potential is quite large for getting in private investment. This will also enhance the business of existing kirana shops and other micro businesses which will get an opportunity to scale up.

The temple was originally conceived to be built at a cost of Rs 1800 crore and going by market estimates the cost could have touched Rs 3000 cr. This includes cost of construction, materials, machinery, labour, and other administrative expenses. The government has estimated an outlay of Rs 85,000 cr for development of the district over a period of 10 years. While this is more of intention, the sectors analysed here are more real and the benefits would be flowing in the next couple of years.

This said, there is evidently need for the state government to work harder to ensure that the basic infrastructure amenities are available or else this can be a deterrent for investors. As mentioned earlier UP does lag the national standards on several counts and provision of power and good roads with civic amenities are a must to ensure that the district economy develops along with the attractiveness of tourists. While the temple is in urban Ayodhya it has been seen that all the adjoining areas in the semi-urban surrounding develop simultaneously which can hence be leveraged well with the right policies in place. Hence there is a longer distance that the municipal of Ayodhya as well as the state government should go to ensure that there is balanced focus so that these loose ends are connected.

It can be seen that in the coming years religious tourism adds a new dimension to economic growth as there is increased interest of the population. It also gives some hints to the other states to work towards improving conditions around religious places of interest as it will help to foster faster growth.

The budget has been about making numbers add up: Mint 2nd Feb 2024

 

Roadmap to the future: 2nd Feb 2024 Business Line