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How`s Business...By Zee News Business Editor M K Venu
Zee Business Editor M K Venu`s weekly coloumn on business matters.
Good monsoon will revive neither agriculture nor economy
A good monsoon and prospects of higher agriculture production this year has got analysts speculating that a surge in rural demand may cause some upturn in an otherwise sluggish industry growing at barely 2.5 per cent so far. Optimists say that a good monsoon will put the economy back on the 6 per cent growth path. But we may be counting our chickens a trifle early. Some economists say a higher agriculture production may not lead to more incomes in the hands of the farmers. In fact, it is feared that the farmers will suffer a negative income effect, in spite of higher production because farm prices have collapsed.
Higher agricultural production will add another 10 to15 million tons of wheat to the already overflowing stocks of foodgrains (60 million tons, comprising 37.55 million tons of wheat and 22.86 million tons of rice), without significantly augmenting farm income and domestic foodgrain consumption. Only traders and middlemen stand to benefit from the bumper harvest, and not necessarily the peasantry. In Indian agriculture, marginal (below one hectare) and small holdings (one to two hectares) constitute almost 94 per cent of the total holdings; therefore, a substantial part of their agricultural production is for subsistence rather than the market and even a bumper harvest will not yield much marketable surplus from this category. Farm income for a large section of the Indian peasant population will continue to remain the same and therefore an increase in rural demand cannot be taken for granted. It is the medium (4-10 hectares) and large (10 hectares and above) landholders who produce marketable surplus, employing capital-intensive techniques of cultivation and hired farmhands. The government is likely to procure 12-15 per cent of total rice production and 15-20 per cent of total wheat production; the rest will have to be picked up by private traders, who would lower prices to protect their margins. Worms crawl out of FI woodwork Indian public financial institutions have come under a microscope following the huge losses incurred by India’s biggest mutual fund Unit Trust of India due to its speculative investments in the stock markets.
The focus has now fallen on government insurance companies, LIC and GIC, as well as lending institutions like IDBI, IFCI and ICICI. The larger issue being examined by the government is whether Indian financial institutions, traditionally seen as the main source of funding for industrial growth, are cracking under competitive pressures and mismanagement. The present state of financial institutions and banks could pose a bigger systemic risk in future, as had happened in East Asia in 1997. The government and RBI are looking at new ways of regulating public financial institutions, especially the ones like UTI, which escaped strict scrutiny. The Reserve Bank has submitted a detailed report to the Joint Parliamentary Committee on the stock scam which reveals that even term lending institutions like IDBI and IFCI had extended loans to companies currently being investigated for their involvement in the stock scam. Even government insurance companies like LIC and GIC invested in fraudulent and unlisted software companies. The RBI and CBI are examining the manner in which funds from insurance companies and lending institutions were diverted to the stock market.
In the meantime, a Damocles sword hangs over financial institutions - they are gripped by a fear of investigative agencies going into every decision taken by them. This will have a negative consequence. They will stop taking even genuine investment and lending decisions for sometime for fear of being prosecuted. Unfortunately, the current regulatory and investigative mechanisms do not clearly distinguish between a genuine mistake by institutions and malafide decisions taken with the intention to benefit some private parties. Parliament divided on Air India The disinvestment of Air India has the Parliament vertically divided on the issue, with MPs cutting across party lines opposing its sale to the only qualified bidder, the Tata-SIA consortium.
Air India divestment seems to have got more politicized because of the nature of the deal—a high-profile national carrier in which politicians have more interest than they would in a non-glamorous public sector company. Though Disinvestment Minister Arun Shourie is depending a lot on the Tata’s reputaion as an ethical company to push the deal through, a premier Bombay based industrial house, which has no love lost for the Tatas, and sees itself as corporate India’s main mover and shaker, has intensified its campaign through Parliament members.
Arun Shourie’s problem is his own partymen, even senior Cabinet colleagues are trying to sabotage the deal. To win media support against the privatization, minister for Civil Aviation, Sharad Yadav, has begun sending journalists by the hordes to London, free of cost. Journalists are being told subtly that such freebies will disappear once AI gets privatized! Disinvestment Minister Arun Shourie has been isolated, with the Civil Aviation Minister Sharad Yadav privately opposing the deal, though publicly he still smiles and shakes hands with Shourie.
A good monsoon and prospects of higher agriculture production this year has got analysts speculating that a surge in rural demand may cause some upturn in an otherwise sluggish industry growing at barely 2.5 per cent so far. Optimists say that a good monsoon will put the economy back on the 6 per cent growth path. But we may be counting our chickens a trifle early. Some economists say a higher agriculture production may not lead to more incomes in the hands of the farmers. In fact, it is feared that the farmers will suffer a negative income effect, in spite of higher production because farm prices have collapsed.
Higher agricultural production will add another 10 to15 million tons of wheat to the already overflowing stocks of foodgrains (60 million tons, comprising 37.55 million tons of wheat and 22.86 million tons of rice), without significantly augmenting farm income and domestic foodgrain consumption. Only traders and middlemen stand to benefit from the bumper harvest, and not necessarily the peasantry. In Indian agriculture, marginal (below one hectare) and small holdings (one to two hectares) constitute almost 94 per cent of the total holdings; therefore, a substantial part of their agricultural production is for subsistence rather than the market and even a bumper harvest will not yield much marketable surplus from this category. Farm income for a large section of the Indian peasant population will continue to remain the same and therefore an increase in rural demand cannot be taken for granted. It is the medium (4-10 hectares) and large (10 hectares and above) landholders who produce marketable surplus, employing capital-intensive techniques of cultivation and hired farmhands. The government is likely to procure 12-15 per cent of total rice production and 15-20 per cent of total wheat production; the rest will have to be picked up by private traders, who would lower prices to protect their margins. Worms crawl out of FI woodwork Indian public financial institutions have come under a microscope following the huge losses incurred by India’s biggest mutual fund Unit Trust of India due to its speculative investments in the stock markets.
The focus has now fallen on government insurance companies, LIC and GIC, as well as lending institutions like IDBI, IFCI and ICICI. The larger issue being examined by the government is whether Indian financial institutions, traditionally seen as the main source of funding for industrial growth, are cracking under competitive pressures and mismanagement. The present state of financial institutions and banks could pose a bigger systemic risk in future, as had happened in East Asia in 1997. The government and RBI are looking at new ways of regulating public financial institutions, especially the ones like UTI, which escaped strict scrutiny. The Reserve Bank has submitted a detailed report to the Joint Parliamentary Committee on the stock scam which reveals that even term lending institutions like IDBI and IFCI had extended loans to companies currently being investigated for their involvement in the stock scam. Even government insurance companies like LIC and GIC invested in fraudulent and unlisted software companies. The RBI and CBI are examining the manner in which funds from insurance companies and lending institutions were diverted to the stock market.
In the meantime, a Damocles sword hangs over financial institutions - they are gripped by a fear of investigative agencies going into every decision taken by them. This will have a negative consequence. They will stop taking even genuine investment and lending decisions for sometime for fear of being prosecuted. Unfortunately, the current regulatory and investigative mechanisms do not clearly distinguish between a genuine mistake by institutions and malafide decisions taken with the intention to benefit some private parties. Parliament divided on Air India The disinvestment of Air India has the Parliament vertically divided on the issue, with MPs cutting across party lines opposing its sale to the only qualified bidder, the Tata-SIA consortium.
Air India divestment seems to have got more politicized because of the nature of the deal—a high-profile national carrier in which politicians have more interest than they would in a non-glamorous public sector company. Though Disinvestment Minister Arun Shourie is depending a lot on the Tata’s reputaion as an ethical company to push the deal through, a premier Bombay based industrial house, which has no love lost for the Tatas, and sees itself as corporate India’s main mover and shaker, has intensified its campaign through Parliament members.
Arun Shourie’s problem is his own partymen, even senior Cabinet colleagues are trying to sabotage the deal. To win media support against the privatization, minister for Civil Aviation, Sharad Yadav, has begun sending journalists by the hordes to London, free of cost. Journalists are being told subtly that such freebies will disappear once AI gets privatized! Disinvestment Minister Arun Shourie has been isolated, with the Civil Aviation Minister Sharad Yadav privately opposing the deal, though publicly he still smiles and shakes hands with Shourie.