Modi, Monsoon and Markets

Modi, Monsoon and Markets

By: Vijay Sardana

Why UPA government Lost Election?

 

Answer: Uncontrolled Inflation affected living standards of common man. Affordable food, education, healthcare and housing are preconditions for common man to ensure stable government.

Question for you to consider:

Mr. Modi will seek re-election in the year 2019. What should be the Voters' Feedback in 2019. Any Guess.

Let us think ahead to think logical.

Can you guess what will be the price of the following items in the year 2019?

• 1 kg Rice
• 1 kg Wheat
• 1 kg Sugar
• 1 kg Potatoes 
• 1 kg Onion
• 1 kg Tea leaves
• 1 Unit Electricity
• 1 lit Mustard Oil
• 1 lit Milk
• 1 lit Petrol
• 1 lit LPG Cylinder
• 1 lit Diesel
• 1 kg Silver
• 1 US Dollar
• 1 GB Internet download 
• 1 Minute Mobile Talk time

Pl. do this for your city only, for which you have to pay. Please don't try to do it as national average. 

If you can’t guess than what will be your reference point to judge success or failure of Modi Government. Think about it. You may have better idea.

Last week, I asked these questions to farmer leaders, in the presence of Dr. Swaminathan and Dr. Abhijit Sen at India International Center. The answer was milk price about Rs. 80 to 100 per lit and wheat price about Rs. 50 to 60 per kg. 

What is your reaction to these prices? Are these price high or low? 

How much percentage of monthly income average citizen should spend on food? Currently, it is about 60%. 

Today, Sensex is 25000+, NIFTY is 7500+, Monsoon has arrived at Kerala coast. 

We will do reality check every year. We will see in which direction country is progressing.

You must be thinking why I am raising these useless untimely issues. You may be right. I my view unless we know what is the destination, what you will plan to reach there.

I am not pessimistic, but I want clarity of goals so that we all can work in that direction. Moreover, Modi government has not yet announced any policy measure to check inflation. They must be planning to make policy changes in coming days. So, we have to see what is in the store for all of us.

In case Mr. Modi wants to keep food inflation under check, he has to work backward it means he has to plan at what price wheat should be produce in India which is profitable to farmers and affordable to consumers. It means food production is not enough, cost of food production for farmers and affordability of food for consumers will decide the success of inflation control policy of Mr. Modi. Otherwise, price rise will be an issue in 2019 elections. Will people vote for him again? Time will tell.

In my view, the biggest challenge for Mr. Modi is to develop a very effective forecasting system for monsoon, production and inflation. This will help them in taking timely decision so that people can feel comfortable with changes in market place.

Background:

The BJP election manifesto promised price control and employment generation to people of India. Other promises made by BJP in election manifesto are:

• Use of technology to disseminate real time data for farmers and decision making
• Creation of National Agriculture Market
• Ensuring food, agricultural, nutritional and environmental, wealth, health and energy security of the people on a sustainable basis, using science and technology.
• We will pursue a mission mode project under the 'National Rural Internet and Technology Mission' for use of tele-medicine and mobile healthcare for rural healthcare delivery; use of IT for agriculture for real time information, Self Help Groups; retail trade and SMEs; and rural entrepreneurs, etc.
• Create Cluster based Storage systems (e.g. Rice Cluster, Wheat Cluster, F&V Cluster, Spice Cluster)
• Introduce the concept of consumer friendly farmers’ market to reduce wastage, increase in income and risk coverage
• Reform the APMC Act to minimize transaction costs.
• Capitation fee in medical and other professional college will encourage and create corrupt system in India. This must be stopped at all cost for the welfare of India.

Any many other promises for agriculture sector were also made.

Based on these assurances people of India gave mandate to the new government.  In order to fulfill the promises the new government will focus on policies to attract investments in manufacturing and agriculture sector.

Implications on Commodity Markets:

Any manufacturing activity will need raw material and mostly commodities either from agriculture or from mining areas. Some industries may need products of primary processing industries in the form of value added agriculture products like oil, sugar etc. or metals like Iron, Zinc, copper, lead, gold, silver, etc.

There are estimates that with thrust to manufacturing sector by Indian policy makers to create employment in India, India will also become one of the largest consumers of commodities in the world.

By giving thrust to manufacturing industry and construction industry for infrastructure development, the immediate impact will be on commodity prices. Demand – Supply imbalance will create price rise in short term. This price rise can be serious political issue if this happens in distorted manner and the benefit is not percolated down to farmers and other suppliers.

The best option to spread the gains of price rise in commodities is to ensure transparent price discovery system for commodities so that all can have better understanding of price rise.

The BJP manifesto talks about use of IT to ensure transparent price and delivery system, creation of National Agriculture market and better returns to farmers.

There cannot be better option that well regulated commodity markets and commodity exchanges. Today, farmers are using commodity exchange prices to bargain with local buyers. This has helped the farmers in big way in demanding right price for their produce.

At the same time, by looking at future prices government departments can also develop advance planning to mitigate the shortages of commodities which is reflected in price movements in future months.

With strong warehousing infrastructure attached to commodity exchanges, one can create meaningful and more transparent and credible alternate to existing APMCs and the promise of APMC Act can also be met with this approach.

Banking system should also encourage their clients to go for hedging to minimize the possibility of bad debts and loss making business operations. That their credit lines offered to industrial players are properly hedged in highly globalized and volatile commodity markets. This volatility can be due to changing currency rates, policy changes in India and also international developments.

What can be the better way than this?

Possible options before the government:

• Ensure proper and effective regulatory authority for Commodity Markets.
• Make amendments to FCRA Act to invite more professionalism and investments.
• Remove uncertainty about governments view on futures market from the minds of investors and hedgers.
• Encourage farmers to use future market prices as reference prices while selling their commodities.
• Minimize transaction cost by making suitable amendments to relevant applicable laws.
• Treat Futures market and commodity markets as advance signalling mechanism for policy makers and farmers as well so that proper and suitable actions can be taken well in time.
• Future markets should be modified in such a way that long term price forecasting is possible for the farmers, even before the sowing season so that farmers can decide which crop is more profitable for him or her. This will also help buyers to hedge their positions in advance. This will price stability in the commodity markets and policy makers can also plan which commodities need their attention and why. This will help government to ensure proper governance without creating panic in the market place due to adhoc and haphazard policy interventions.
• With strong commodity markets and stability in Policy making environment, investor will feel comfortable and this will attract more investment and will support the cause of employment generation.
• In the last, when India will be a major consumption center for commodities, in that case it make political sense to have price discovery in India by local commodity markets in place of depending upon other overseas markets for domestic policies.
• We will also need Agriculture Technology Policy to ensure good technology at an affordable price to farmers.

What do you have to say?

Any views….if yes, do write in comments section below.