IMF’s 4.8% Growth Outlook For India... Outlook 22nd Jan 2020

While the IMF guards such statements with the condition of availability of fiscal space, there will be some tough decisions that may have to be taken by the government on Feb 1 when the Union budget is presented, as it involves taking a call on the fiscal numbers.

The downward revision in GDP growth number for India to 4.8 per cent for 2019-20 by the International Monetary Fund (IMF) was largely expected since it was indicated earlier in December that there was a revision forthcoming in January. Besides, the RBI had already lowered the forecast to 5 per cent for the year from over 7 per cent at the beginning of FY20, and most other forecasts are in the same range.

The IMF forecasts are twofold. The first is for FY20 where the assessment is that there is definitely a slowdown in the economy which has been sharp enough to bring down overall growth of the world economy given the growing dominance of India. While we tend to look more on the demand side, the IMF has highlighted the fluid situation on the financial side, especially banks and NBFCs which are still not out of the woods.

As a multilateral financial institution, the state of the financial sector is critical as it provides funding for future growth and unless it is in order the economy recover will not get back on track. In fact, given that the RBI’s Financial Stability Report (FSR) has projected a marginal increase of non-performing assets for both banks and NBFCs for September 2020, the IMF has put its finger on a pertinent issue.

The general list of suggestions of the IMF are on both monetary and fiscal policies, this is where the second forecast matters for FY21 which is put at 5.8 per cent – which, though not really high, is the first official one in the economists’ domain for the coming year. The economy needs monetary support from the RBI and the path pursued during the year will be crucial for future growth.

The Monetary Policy Committee will surely keep this at the back of the mind when deliberating on policy actions during the course of the year. Some more rate cuts and liquidity support may have to be considered, and with there being some talk on a new window of finance being provided to NBFCs, there will be more discussion in the coming months.

The other indication given pertains to fiscal expansion. While the IMF guards such statements with the condition of availability of fiscal space, there will be some tough decisions that may have to be taken by the government on Feb 1 when the Union budget is presented, as it involves taking a call on the fiscal numbers. The higher growth of 5.8 per cent will be contingent on certain affirmative action to be taken by both the government and the RBI as the Fund believes that such action is required in a situation of low growth across the world.

India’s growth number will be critical form the point of view of the global forecast made by the IMF of 3.3 per cent over 2.9 per cent in 2019 as the advanced economies are expected to slip this year and the onus will be on the developing countries to compensate for the lower growth. China is also expected to slide marginally and hence the 5.8 per cent growth number for India will be critical for achieving the global growth number of 3.3 per cent along with some other emerging markets like Russia and Brazil.

Budget 2020: How to make things work this time? Spend, spend, spend : ET ONline 15th Jan 2020

2019 has been a year when the economy went through various phases of economic swings and by now it has been accepted that there is a slowdown in the economy. The emphasis so far has been on monetary policy where the MPC has carefully deliberated the situation and lowered the repo rate by 135 bps. This was good from the supply side where the attempt was to make the cost of capital lower for industry. But with the problem being largely on the demand side, the impact tended to be limited. There has ..

The FM has been proactive in terms of addressing sector-specific issues so far. With the Budget coming up, there is scope for enhancing the effectiveness of fiscal policy to revive growth. In the last few months the FM had lowered the corporate tax rate which was to give a boost to corporate profits which in turn should set the stage for higher investment and growth. While it is too early to judge the efficacy of this measure, it was observed that most companies took advantage of the lower tax rate but have not yet invested the same. There is speculation that companies may be using the same to pre-pay debt or enhance dividend in difficult times to keep up investor sentiment. Clearly, something more direct is required to ensure that spending takes place. 

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The Budget will be presented at a time when there is uncertainty on revenue collections for FY20 leading to fiscal slippage. If the goal is to use this opportunity to focus entirely on growth, what should the FM do?

The first measure is ideological wherein the government should skip the fiscal path of prudence and make a more realistic budget that focusses single-mindedly on growth. Therefore, the fiscal deficit ratio should not be the starting point of the exercise (which it is today, as all other numbers are decided based on this end-ratio). This will mean that it should not be a compromise number of being within the 3-3.5% mark but a bold measure that keeps the number 1% higher than the deficit in 2019-20.

Second, the extra money that will come from the enhanced fiscal deficit has to be accounted for by higher expenditure and/or lower tax rates. This will be a delicate call to take. One option is to channel the entire amount into capex which will enhance the outlay from Rs 3.4 lakh crore (FY20-B) to Rs 5.4 lakh crore and directly add to demand for other products of industries like cement, steel, machinery, etc. These backward linkages built by higher outlays in roads, railways and urban development ..

. The alternative is to balance the same across tax cuts and expenditure. With corporate tax already being rationalised, there is a strong case for lowering of income tax rates in such a way that there is more spending power. The focus of the government so far has been on providing sops at the lower level of the income scale. But this will not be adequate as the spending power at the lower levels tends to be limited — especially when inflation, especially food inflation, is rising. Even at the cost of providing benefits to the higher income groups, sops at this end would work to revive demand as benefits on, say, capital gains can help to channel demand into high-end goods such as housing and automobiles.

Third, the PM-Kisan Scheme is a well-constructed one which provides Rs 500/month to every family. This amount has to increase to have an impact as the present amount is too small to make a difference. While it was a good pilot to begin with, it needs to be substantial to make a difference. Probably, some of the social schemes that are not really delivering results can be abandoned based on government audit and the money given directly to the poor so that their spending ability improves.

Fourth, the disinvestment calendar has to be stated at the time of the Budget so that it does not hang in abeyance for the entire year, which has been the case till now. It is a very useful source of revenue as there is potential to get Rs 1 lakh crore every year which can be used to shore up the budget or even better, be used to earmark specific capital expenditures. As there is a lot of reluctance to sell such assets, the plan should be stated upfront in the Budget and the timeline provided so that the exercise becomes a reality.
The FM has already announced measures to ease the tax system in terms of processes and procedures as well refunds and tax credits which hopefully should make things easy for all tax payers. As most of the policies for various sectors have been announced, the Budget can concentrate on this single goal of reviving economy through spending in the most efficient manner. It will mean some trade-offs in the sense that there can be a tilt towards the higher income groups, but may be necessary to make to make the engine fire. It should be remembered that a high outlay spread across a wide mass of people — though egalitarian and necessary during normal times — cannot deliver results in tough times. Hence it has to be concentrated in areas where spending power resides.

In this context too, the GST framework needs to be revisited. First, if price transmission has not taken place, the same needs to be brought forward to the authorities. Second, the relationship between price and demand should be studied closely and tax rates adjusted in the next round of meetings. Rather than changing rates based on the level of affluence, it should be based on elasticity of demand to ensure that the tax revenue actually increases.

In short, if the Budget has to succeed in reviving growth, the focus should be on spending with some compromise on the fiscal ratios. In a way it will be a fiscal holiday, but it's worth a try nevertheless.2019 has been a year when the economy went through various phases of economic swings and by now it has been accepted that there is a slowdown in the economy. The emphasis so far has been on monetary policy where the MPC has carefully deliberated the situation and lowered the repo rate by 135 bps. This was good from the supply side where the attempt was to make the cost of capital lower for industry. But with the problem being largely on the demand side, the impact tended to be limited. There has ..

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https://economictimes.indiatimes.com/news/economy/policy/budget-2020-how-to-make-things-work-this-time-spend-spend-spend/articleshow/73265269.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst2019 has been a year when the economy went through various phases of economic swings and by now it has been accepted that there is a slowdown in the economy. The emphasis so far has been on monetary policy where the MPC has carefully deliberated the situation and lowered the repo rate by 135 bps. This was good from the supply side where the attempt was to make the cost of capital lower for industry. But with the problem being largely on the demand side, the impact tended to be limited. There has ..

Read more at:
https://economictimes.indiatimes.com/news/economy/policy/budget-2020-how-to-make-things-work-this-time-spend-spend-spend/articleshow/73265269.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Govt trying to address demand-side problem with supply-side measures: ET Now interview 14th Jan 2020

Madan Sabnavis, Economist, CARE Ratingssays there is a strong reason to believe that RBI will not cut rate in February, as inflation has moved up by factors over which the government has little control. Excerpts from an interview with ETNOW.

ET Now: It is as much of a shocker for you as it is for everybody with CPI number overshooting the RBI target. Should one assume that a Feb rate cut is completely ruled out?
Madan Sabnavis: Yes, the rate cut is definitely ruled out. In fact, if the number comes over 6 per cent for one or two more times, which is quite possible, one could actually argue for a rate hike. But rate cuts can be kept out of the radar for the time being. The fact that inflation has moved up and it has been caused by factors over which we really have very little control, there is a strong reason for us to believe that there will be a pause by the RBI this time. Of course, there will be the wisdom of the Budget which would have been presented by the time RBI comes up with a review on the repo rate and one should think that those particular numbers would also have a bearing. And more than the numbers, it will be the credibility of the numbers. We really think the government will be able to stick to the fiscal deficit in 2021 and that is the question which is really going to be addressed.

We have seen that even for this particular year, that is FY20, there have been a number of challenges in terms of revenue generation since the tax revenue has not quite gone up. We are still talking in terms of maybe RBI paying an interim dividend to shore up the overall finances. So, a rate pause is more or less given for this particular time, and the interesting thing will be as to how these inflation numbers play out. In January, there would be some kind of cooling down of these numbers because we have seen the prices of onions have come down this month. So, that should probably temper the number for January. Things should be more comfortable from here but we have to watch.

ET Now: What ammo do you think the central bank has at this point of time? Growth is falling, although we did see a bit of relief on the IIP front. But now you have inflation. Do you think we are in a Catch-22 situation?

Madan Sabnavis: I would not say it is a Catch 22 situation, because the problem has always been on the demand side and we have been trying to address it on the supply side. RBI has been reducing repo rate and asking banks to bring about an improvement in transmission. Similarly, if you look at all the policies which the finance minister has been announcing, except for the cut in corporate tax rate, most of them have been on the supply side to make sure that things are eased out. But the fundamental problem is on the demand side. There is not much spending taking place. There has to be something done directly on the demand side and that is why all eyes are on the budget to see if any kind of a bold decision is taken to say, look we are not going to stick to this 3 per cent number, we are going to go in for a higher fiscal deficit, channel it in a proper manner to make sure that there are demand forces which are created, which would have backward linkages with the rest of industry and that is how we bring about growth. So that is what we should be looking forward to on 1st February

Fiscal implications of GDP forecast: Free Press Journal 13th Jan 2020

The GDP forecast of 5% for FY20 was largely expected as the CSO bases these numbers on extrapolations of data available till date. Hence with the knowledge of GDP growth being 5.5 and 4.5% in the first two quarters of the year and some high frequency data on IIP growth and core sector growth being known for October and November, all forecasts were in the range of 4.8-5.2%. Therefore there was no element of surprise.

This number is however significant as it does show that besides agriculture, where the growth rate is almost the same as last year and the government sector (public administration), all other segments are to register lower growth this year.

Therefore, even while some experts do talk of observing the ever elusive green shoots, they will not be spread over a wide canvas and would be localised.

The indication hence is that there is a generalized slowdown and despite myriads of policy reforms brought in by the government since August, the impact has been limited. One will evidently have to be patient for all these reforms to work out.

With the Budget around the corner the focus will be directed here since it will set the tone for the next fiscal. Monetary policy so far has been very accommodative to the extent that it may have lost its sting given that the 135 bps cut in repo rate has delivered neither the required transmission to lending rates nor has it shown an uptick in investment.

And here, the national income data shows a decline in gross fixed capital formation rate from 29.3% to 28.1% this year, which more or less settles the issue on investment.

This is not surprising because the problem in India has been on the demand side and the response has been on the supply side, either through repo rate cuts or easing of various impediments in various sectors such as auto, real estate, SMEs which will help in the medium run, but cannot turn around the economy significantly.

Probably the only two direct measures taken on the demand side by the government last year was the PM-Kisan scheme which allocated Rs 75,000 crore as cash payments to farmers and the corporate tax rate cut. The impact has not yet been observed, if at all.

In case of the cash transfer, assuming that it has gone as per schedule the amount per family at Rs 500/month is too small to really bring about the big ticket consumption.

The amount has been spread over a large population of 125 mn families and given that food inflation has been rising quite prodigiously has meant that this additional income could have gotten spent on necessities.

As far as the corporate tax cut is concerned, while the Q2 results indicate that most companies have made use of this new rate and foregone other exemptions, the money saved has not yet been deployed for investment.

This can be because when there is limited demand and surplus capacity, there is less need to invest.

Some companies may have preferred to repay debt and this is possible as deleveraging has been a trend in the last few years. Or they may also use these savings to pay higher dividend to shareholders at a time when profitability conditions are also weak.

In this situation, the Budget assumes importance as it has the potential to provide a direct push to the economy by either lowering income tax (which is the only one that can feature given that corporate tax rates have been cut and the commodity tax rates are within the purview of the GST Council) or increasing expenditure significantly.

While this may sound straightforward it should be remembered that the government has to pay obeisance to the FRBM norms and hence the fiscal deficit number that is chosen will be important as all other calculations would follow from here.

The fiscal ratios get affected by the GDP numbers and hence the 5% growth forecast for FY20 gets embedded in the revised fiscal deficit ratio of the government and moves up by at least 0.15% other things being equal. Also if growth is 5% for FY20, the projected growth number for FY21 would have to be benchmarked with this forecast.

Practically speaking, it cannot be more than 6% (or nominal growth of 10% as against 11.5% budgeted and revised to 7.5% last year) and would get linked with future tax revenue collections in FY21.

Therefore, the government has to take a call on the comfort level of the fiscal deficit ratio which is acceptable as the present FRBM rules talk of 3% being the ideal number with a suitable glide path.

Hence everything will hinge on whether the government would deviate significantly from this path and work on a stimulus package or continue on the road of prudence and let the process move in the ordinary course. This will be revealed on 1st February

Market Mover | Some trading lessons from the past: Book review: Financial Express 12th Jan 2020

All of us are aware of Nasdaq being the IT exchange where tech firms get listed, and the health of the IT sector is caught quite appropriately by the relevant indices. What we are less aware of is the crisis that the exchange went through when the dot.com bubble burst when the IT firms, which had earlier rushed to Nasdaq for listing, were just not seen.

This is when Bob Greifeld took over as the CEO and chairman of Nasdaq to bring about a radical transformation from 2003 to 2016. His book is a part autobiography, as the story narrated in Market Mover is about Greifeld’s tenure on the exchange. The business of an exchange is quite unique. First, there is limited but tough competition. Second, income comes from having more companies listed on the exchange, traders paying their fees and the sale of data.

Therefore, it is all about volumes and if they slow down, the exchange would be in trouble. If one looks at Indian stock or commodity exchanges, the reason for natural monopolies to emerge is that others could not get enough trading done on their platforms. Nasdaq benefited from the IT sector as it came in handy to these small companies, which were not of interest to New York Stock Exchange (NYSE).

Greifeld goes on to narrate how the exchange was taken from the brink to re-emerge as a strong player, with several merger attempts made along the way. In course it won the confidence of companies as well as traders. The more fascinating parts of the book are the various management lessons that are reinforced by the author. Greifeld talks of five important tenets to keep in mind for success. The first is to get the right people on board. Here he shows how he managed to get the staff involved to bring about the transformation. Though, on the flip side, several people were asked to leave. This is something he believes has to be done when the new challenges require new hands and the existing staff, due to age and mindsets, cannot easily adapt.

Third is to reduce bureaucracy, which is a standard lesson taught in the classroom where delegation is of essence as people should feel empowered, which makes them responsible too. The idea is that a company is run by the employees and only guided by the CEO, who gives directions and takes responsibility for the action taken. The fourth important tenet is to pay attention to fiscal discipline, which again holds for all companies. Cost control is important because a business like trading will have ups and downs, and it is in the latter phases that costs matter when the top line does not increase. Fifth, he talks of overhauling technology, which is the way to go. In fact becoming fully online was Nasdaq’s winning edge brought about by Greifeld. Last, even in a business like stock trading platform, the quest to race ahead must be there and one should never be satisfied by being the Number 2.

This calls for innovation and has been the case with Nasdaq, which involved several strategies, including acquisitions to build scale. He talks a lot about how important the customer is and how the marketing team went all out to get companies to opt for dual listing because a list with big names automatically brought in other companies. This technique became a kind of trend setter, which was Nasdaq’s forte.

Mergers and acquisitions is another area that Greifeld has spoken of at length, and there were successful ones like OMX and unsuccessful ones like the London Stock Exchange (LSE) or even NYSE. But he has tips for CEOs on the different risks involved that have to be evaluated. Core business risk is the most important one. If the targeted one is away from the core activity, the quantum of risk increases. Next is geography. If the targeted company is geographically distant from the acquirer, the risk magnifies. This means tapping into a new set of customers, which, though a great opportunity, has to be understood right, or else the deal can back fire. Cultural differences can be a major stumbling block once the merger takes place and integration plans are necessary before signing the deal. Finally, the head count and the matching of skills carry a risk that may be difficult to gauge when going in for the deal.

He also takes us through the major blunders that Nasdaq was involved with when e-technology was challenged like during the Lehman crisis, where the volumes caused by panic pressurised the system. The same held for the Facebook IPO, where the glitch was severe and a blow to the reputation more than anything else.

According to the author, the lessons learned are that the leader has to take the heat and not hide back, which is what several of them do when there is failure. This can happen only if one takes success and failure in the same stride.

Innovation, innovation and innovation is the mantra for success, and one should never be complacent. This is an important lesson because often one falls into the comfort zone. When the blow comes, it takes the company unawares. The author believes that failure is an experience and what is more important is not the slope but the trend; and the job of the CEO is to be on this path. It makes a lot of sense and good reading. In the last chapter he also gives a hint to all CEOs who do not want to relinquish their jobs. Everyone has a time when value is added and at some point they need to move on.

Oil price rise: What the oil price spike could mean for India: Financial Express 11th Jan 2020

It is almost a stylised fact that a crude oil price shock is an annual feature; and this time, it has struck at the beginning of the year. The shock is always singular as it is caused more by geo-political tensions with Iran being the fulcrum of the controversy for some years now. There was a time when OPEC could move prices given the oligopolistic power wielded by them, but this is passé. With American shale-based oil entering the market and the US becoming one of the largest suppliers, the power of OPEC has gone down to an extent.

The recent imbroglio in Iran has led to the price of crude moving towards $70/barrel and stock markets getting into a tizzy with panic striking across the forex markets. Investors are searching for new havens, and the non-dollar currencies like euro and yen seem to have been preferred to begin with. In such situations, the logical thing to do is to wait and watch, and see if the disturbance is temporary or permanent. If it is the former, then time would be the healer. But, if it is the latter, there could be some implications for us as there is a lot of dependence on imports.

Just how important is oil in Indian economics? The first thing that comes to mind is inflation, as higher oil prices means higher fuel prices, which, with the exception of LPG and kerosene, would be transmitted directly to the consumer. The price of petrol and diesel have moved up immediately as there is no subsidy element and the pricing system is on a daily basis. Curiously, at the macro level, the WPI gets impacted more given the weight of these products. In case of the WPI, the weight of all crude related products is around 10.4%, which means that 10% increase in crude price can potentially lead to 1% increase in WPI inflation. And, given that it is presently moving in the negative terrain, the potential increase can make it positive. In case of CPI, the direct weight is lower at 2.4%, and hence, the inflation impact is moderate even though this would be affecting households directly. This also means that RBI would be less concerned when looking at the monetary policy as the CPI effect would be less bothersome and the WPI effect not really relevant from the point of view of monetary policy.

Oil is also important for the government on both the revenue and expenditure side. On the expenditure side, the subsidy level gets impacted and with the present targeted amount of Rs 37,000 crore, there would be an upside risk in case crude oil price remains high for a prolonged period of time. Therefore, the FY21 budget would be watchful of this phenomenon as it would be drawn on the basis of an assumption of crude oil price, which if higher than $65/barrel will enter the budgetary numbers. A higher provision has to be made in case the government is keen to not let market prices increase for these products.

On the other side, the higher crude price is good for the government as there is a lot of revenue to be earned. The effective duty/taxes levied on petrol works out to almost 100% while that on diesel is between 65-70%. These duties are outside the ambit of the GST, and consciously so, as there is a lot of revenue to be earned by the government. In FY19, the central government earned around Rs 3 lakh crore and the state government around Rs 2.3 lakh crore. Clearly, such revenue would end in case these products came under the GST, as the highest slab is 28%, which is much below what is being levied today.

In fact, even if the rate is fixed at say 67% for both the products, this would not work well with the government as the ad valorem rate would mean lower collections in case crude oil prices declined. Therefore, there is an incentive to keep these products out of the purview of GST. It has always been defended on grounds that these products are essential to the consumption basket of the common man, though diesel does enter the transportation costs of goods that are finally passed on.

The other direct impact is on the trade deficit. Crude oil has progressively become less important in the Indian trade basket with this share now being less than 30%. This is so because of various factors. There has been a movement towards alternative fuels which, though marginal today, would expand. CNG has already caught on for vehicles in some metro cities. Second, the slowdown in the economy has meant that there is less demand for fuels, which is getting reflected in the declining share in the import basket. Third, the lower demand for autos has meant that even in future there would not be exponential growth in consumption of oil products. Therefore, crude oil is not as potent a factor in distorting the trade balance, and hence, current account, and eventually the balance of payments position. The oil intensity of growth across the globe has been coming down, which in a way, is a threat to the future of countries that are fully dependent on oil.

With the impact on trade deficit unlikely to be very stark, the rupee should continue to move based on fundamentals which remain strong, mainly due to the strong capital flows witnessed so far this year. Therefore, the impact on the rupee should be muted to this extent. However, of late it has been observed that currencies move more due to sentiment and extraneous conditions, of which, the dollar as the pivot currency holds the clue. As long as the strife signals play out, the rupee would tend to get volatile, though a fair value of 71.5-72 to the dollar looks more likely once normalcy returns. However, of late, the dollar and its strength drives currencies, and as the US exercises power, there would be a tendency for the dollar to strengthen globally which results in currencies weakening across the globe. This can be expected in the coming days too.

The oil crisis comes at a time when the Indian economy is weathering a series of challenges. Stable oil prices were one of the assumptions of monetary policy, which focused more on core inflation. This will change as the price movement becomes more permanent in nature. Fiscal policy also has assumed stable prices within a range and would require some tweaking to factor in this new reality. Hence, this episode of crude oil prices will be watched quite closely by policy makers as the implications go beyond the political overtones that are currently pervading the headlines. The crux will be as to how long does this imbroglio last, and whether it would spread to other neighbouring nations too? Prima facie it looks like being more transient in nature, though one can never tell in such cases.

Should the MSP regime be dumped? Business Line 19th Jan 2020

As it doesn’t cover all crops, it hasn’t been effective. A well-developed derivatives market will serve farmers better

Indian agriculture has some stylised facts that need to be put in perspective. Most crops are grown once a year and post-harvest they are stored and made available throughout the year. Different States have variations in the months of harvest which hence makes the season longer. Next, prices tend to come down sharply when the harvest comes in and rises subsequently. Intermediaries add value by holding the stock for the entire year and bear the cost of carry — such as transportation, storage, interest and risk of damage.

Given this broad structure under which agriculture operates, the government has been pursuing the MSP programme where minimum support prices are offered for all crops just before the sowing time for both the kharif and rabi seasons. The idea is that farmers are aware of what price they could possibly get from the government in the worst-case scenario of prices coming down sharply at the time of harvest. Theoretically, this is a sound policy as it gives assurance to farmers of a fair price. As it based on a scientific formula that covers all costs plus a return on capital, it is fairly remunerative.

However, the major problem with this MSP is that it does not work for all crops. It works where the government has machinery for procurement and that too in specific States. The PDS system has ensured that there is active procurement by FCI for wheat and rice, which is stored according to the buffer stock norms and also used for distribution.

As it is an open-ended scheme, there are no limits to procurement, which creates a different set of problems for the government. However, for the other crops there is no systematic procurement, which means that while MSPs are announced, they are not credible if government agencies are not there to procure the crop and the farmer has to sell at the market prices.

The Table shows that the average mandi price tended to be lower than the MSP in most months, which means that if farmers sold their produce in the wholesale market they were unlikely to get the MSP and the demand-supply conditions would determine the returns. September would generally be the pre-harvest price while the bulk of the harvest would flow in October when the prices tend to come down due to excess supplies.

Time to revisit

The main takeaway is that the MSP system needs to be revisited. To begin with it should be announced only when there is back-end procurement so that it is relevant. Also, it should be across all States and not confined to those where the FCI has the requisite machinery. Access is of importance and FCI should be working with State agencies to ensure that even for paddy the market price should never go below the MSP because whenever it does it stands to reason that the farmers do not have access to the FCI.

Now while cooperatives like NAFED do get involved with procurement at times, it is not universal. If there is no or limited procurement, then the MSP actually sends incorrect signals to the farmers. As these announcements are made before the seeds are sown, farmers take sowing decisions based on these prices.

When the price looks attractive, there would be a tendency for group-think to take over and the acreage increases. This leads to higher supplies, and in the absence of a credible procurement system leads to prices coming down thus impacting the income of farmers which can snowball into indebtedness at times and other associated issues like loan waivers.

Therefore, MSP can be of disservice when an end-to-end solution is not provided.

Is there an option to MSP? A well-developed derivatives market can offer a viable alternative to the farmers and the government where a market solution is used for a pervasive problem of sale of product. As there are at least three running contracts for most agricultural products, we can have the prices displayed for the farmers who take a decision on which crop to sow and simultaneously take futures call in the market so that they are assured of the price.

The month can be chosen based on the time when the harvest would take place. The advantage is that the physical delivery need not take place and while locking into the price, the return is guaranteed. The actual sale would take place in the local market at the lower price, but the reversal of futures contract would make up for the possible lower price in the spot market.

Futures market

The way forward is to develop the futures market across all crops and ensure that multiple contracts are in force all the time, especially during the harvest time. This will help in making better sowing decisions on the crop as well as quantum that is sown. Ideally, options would be better, though they are not easy to understand. They would provide advantage of the upside and cover for the downside at the cost of the option premium. This is similar to the MSP but delivered through the market which is more efficient and can cover all crops.

This is probably the right time to review how this system has worked and since the story played over appears to be the same every year, where prices rule at less than the MSP, it may make sense to dismantle the same. As the eNAM evolves, it can also be integrated with the futures market over the next five years or so. But for sure, announcing prices that are not deliverable does not serve the larger good.