13.01.2011

Politics & the Nation

• What is pushing the farmers (predominantly) to suicide? (Excerpt from an op-ed in today's ET)
• Suicide is a sad and complex phenomenon. Incidents of suicide among farmers are mostly localised in a few pockets in six states in the country: Andhra Pradesh, Maharashtra, Karnataka, Punjab, Chhattisgarh and Kerala. It is not clear as to what is extraordinary about these states that trigger such extreme reactions from farmers. Quite possibly, economic, social and institutional changes in recent years are responsible for the high rate of suicide in some regions. At the same time, certain other societal forces that block modernisation may also be triggering such extreme reactions. Clearly, to blame suicide among farmers on largely external factors such as liberalisation and globalisation misses a major part of the story.
• Cairn-Vedanta deal to get nod next month
• The government is poised to clear the $9.6-billion Cairn-Vedanta deal by the middle of February, ending five months of uncertainty over the controversial deal involving the transfer of India’s biggest onshore oilfield operated by the British explorer.
• The oil ministry has asked Oil and Natural Gas Corporation (ONGC) to stop obstructing the transaction and accept the fact that it is contractually bound to pay its partner’s share of royalty in the venture in which the state explorer was given a 30% equity free of cost. State-run ONGC, hoping to renegotiate the contract, had declared it had pre-emptive rights and the deal could not be completed without its approval.
• The government has now rejected ONGC’s request to ease the royalty burden. India had offered royalty exemption to companies as an incentive to lure private capital to oil exploration in the energy-deficient country.
• The value of total royalty payout is estimated at $2 billion for the life of the field at the approved output. Cairn is currently pumping 125,000 barrels of oil from the Rajasthan field and expected to ramp it up to an approved peak production of 175,000 barrels by next year.
• Vedanta Resources, controlled by London-based billionaire Anil Agarwal, had agreed to buy up to 60% of the Indian unit of Scottish firm Cairn Energy for $9.6 billion on August 16.
• As per the proposed deal, Vedanta Group will acquire 51-60% of Cairn India for about $8.5-9.6 billion in cash. Post-deal, it is expected that Vedanta Resources will hold 31-40% stake in Cairn India directly and group company Sesa Goa will hold 20%.

Finance & Economy

• Titbits about our defence capabilities
• We have nine defence public sector undertakings and 49 ordnance factories.
• While Tejas is our indigenous defence aircraft, Saras is our indigenous civil aircraft.
• Some excellent thoughts on reigning in vegetable prices
• Take a look at this op-ed penned by TK Arun.  Worth a read.  Are Nitish and Buddha listening?  It's their chance to become another Narendra Modi or Kurien.
• An excerpt:
• A supply chain and trading system that give such enormous leverage to middlemen do serious damage of two kinds: one, transmission of the price signal arising at the consumer all the way to the farmer turns fuzzy and, two, the trader acquires the power to manipulate prices. An organised retail industry is the only thing that can tackle this.
• Here are five policy steps that may help in the process of reining in food inflation. (The following is from another article that appeared in ET)
• Deflate the stimulus package. There seems to be excess liquidity in the system, both globally and in India, as a result of the fiscal stimulus given over the last two years to ensure recovery of growth. It has delivered high growth but has also lead to commodity price inflation almost worldwide.  In India, during the last two years, money supply has been growing at almost 20% per annum while agricultural production has grown by only about 3% on average. Too much money chasing too few agri-goods! It is time for a calibrated winding down of this stimulus package by tightening the monetary policy.
• Augment supplies of agri-products.In the short run, it can be done by releasing stocks of wheat, rice and sugar — luckily, the government has much more stocks than warranted by buffer stock norms — and reducing import duties to less than 10% on fruit and vegetables, milk and milk products, etc, where inflation rates are very high. This will give immediate relief to consumers.
• Reform the archaic mandi system. Our agrimandis are in a mess. The APMC has made the value chains long, fragmented and inefficient by blocking competition. The current system rewards middlemen, or commission agents, but does not benefit the farmer or the consumer. The government should invite and incentivise private sector (both domestic and foreign), cooperatives and NGOs to come up with business models that directly link the growers with processors and retailers.  The commissions in the mandi system, especially for fruit and vegetables, need to be restricted to less than 1% compared to 6-8% that is prevailing in most places.  Rationalise taxes and fees in the mandi system. In principle, all food products should be exempt from taxes or fees at the first stage of marketing — these go up to more than 10% in the case of wheat in Punjab and Haryana. These need to be replaced by value added tax (VAT), and the states losing revenue will need to be directly compensated by the Centre.
• Set up a commercial intelligence unit for sensitive commodities. This proposed unit needs to combine information on the production status of key crops from crop forecasting division, on market price status from the marketing division, on stocks, tariffs and trade, and global market situation, and then analyse all these to recommend policy action well in time. This should be done on a monthly basis, if not fortnightly.
• Bring the agriculture reform agenda on priority. The country has had two decades of reforms in industry and services sectors, but agriculture has been waiting for long for a serious package of reforms. Piecemeal efforts will not deliver. The country’s agri-GDP growth is stuck at less than 3% per annum, and extremely volatile in nature. With the challenge of climate change looming large, sustainable agricultural growth will require higher investment in agri-R&D and extension, water and soil management, and also in logistics, processing, packing, and organised retailing.
• It’s ‘worrying’ as IIP dips to 2.7%
• The industrial output growth plunged to an 18-month low of 2.7% in November, prompting Finance Minister Pranab Mukherjee to call the dip ‘worrying’.
• Independent experts, however, dismissed the fall, terming it a slight moderation and a data quality issue. They also backed a move to raise key interest rates to contain inflation.
• The factory output growth, as measured by the Index of Industrial Production, or IIP, was 11.3% in October. Economists had estimated the growth for November at 6.6%.
• Industry has an 18% weight in the GDP.
• The decline in industrial production was driven largely by a slowdown in manufacturing, the largest component in the IIP.
• Manufacturing grew 2.3% in November as against 12.25% in the year-ago month.The slowdown was largely because of a 3.1% contraction in production of consumer goods, 4.3% growth in durables and 6% contraction in non-durables.
• A look at this graphic is worth the time.
• Work speeded up on new index
• The government is accelerating the rollout of a new Index of Industrial Production, or IIP, after several agencies voiced concern over the high volatility of the current index.
• The IIP measures factory output growth.
• A government-appointed panel, chaired by Planning Commission member Saumitra Chaudhury and comprising economic advisers of various ministries, is examining the new index, which has been prepared by the Central Statistical Organisation (CSO).
• The move to set up a new index followed reservations expressed by several organisations, including the Reserve Bank of India, over the current index. These agencies had said that the index, with a 1993-94 base year, has become outdated. They said its product basket was not representative enough as it included several items that are no longer in much use, such as typewriters. The current series of IIP was also criticized for its extreme volatility.
• The ministry of statistics then directed the CSO to create a new index with a base year of 2004-05. This index included a new basket of 500 products. But the plan to introduce the new index was delayed after its trial runs showed it to be no less volatile than the current IIP.
• The government then appointed an expert panel to review the basket of products, reassign weights to reflect current reality, especially in segments such as capital goods and consumer non-durables.
• People close to the development say the revised index will include laptops, mobile phones, LCDs and a number of chemicals that were not manufactured at the time of the last base revision in 1993-94. Weightage to the items would be given in accordance to their share in the gross domestic product.
• IndiGo goes shopping, picks up180 jets
• Gugaon based low-cost airline IndiGo has ordered 180 Airbus A320s from European aircraft manufacturer Airbus for a valuation of $15.6 billion ( 70,000 crore), indicating that the aviation industry is beginning to fly out of turbulence.
• The deliveries are expected to begin from 2016 and continue till 2025. IndiGo currently has a fleet of 34 Airbus A320s. It flies to 24 destinations and has 221 daily flights.
• The national carrier, Air India, had earlier placed an order for 111 Boeing and Airbus aircraft for $11 billion in 2005. The aviation market in India has been growing at 15% and is poised to expand by 20% in the near future, surpassing booming markets such as China and Brazil.
• According to Airbus, IndiGo will use 100 of the 180 aircraft for fleet replacement while the remaining 80 will be used to add capacity.
• Microfinance faces hard times
• MFIs have been seeing a shortfall in interest income and cash, since October.  Micro-loan borrowers, mostly poor women, were already distressed because of a dip in their incomes and the multiple loans they were servicing. Cushioned by the new law, provoked by local politicians and emboldened by the prevailing climate of antipathy towards MFIs, they have stopped repaying.
• Andhra leads all states in micro-loans, with a share of 35%. Now, it has an ordinance that requires MFIs to take government approval before granting a loan, bans weekly collection of dues, and stops lenders from collecting instalment from a borrower's house. Basically, it makes it almost impossible for MFIs to do business.
• January 15 onwards, MFIs will feel the second hit: provisioning. Under the rules set by the Reserve Bank of India, the central bank, if an MFI does not receive interest income for three months, it has to provide for 10% of the loan amount.
• Weekly rotation of cash is critical to MFI operations — and profitability. Since they are barred from taking cash deposits, MFIs functioning as a non-banking finance company (NBFC) rely on three sources of funds: equity and grants, surplus from past operations, and loans from banks.  Bank loans accounted for 71% of MFI funds in 2009-10.  An MFI borrows from banks at 11-14% and lends it on, mostly to poor women, at an average lending rate of 28%.
• MFIs also profit from rotating the money. MFIs repay banks on a quarterly or halfyearly basis; however, their borrowers repay MFIs on a weekly basis.

International

• Why the European bailout is set to fail
• The return of European sovereign debt problems in late 2010, culminating in the bailout of Ireland, highlighted the deep seated and perhaps intractable problems of some over indebted European nations.
• As in the case of Greece, the bailout package dealt only with short-term liquidity, failing to address Ireland’s longer term solvency.  The arrival of an IMF/EU team to prescribe a “cure” did not inject confidence in an imminent recovery.
• The Irish bailout facility totalled €85 billion, made up of €35 billion for the banking system (€10 billion for immediate recapitalisation and €25 billion to be provided on a contingency basis) and €50 billion to cover the financing of the state.  Estimates suggested that Irish banks alone required around €16 billion in capital and further €38 billion in financing. This totalled €54 billion, a large chunk of the €85 billion package. Given that Ireland required €70 billion to meet maturing debt until 2013, the size of the bailout facility was arguably inadequate.
• In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies like Ireland and Greece, may be able to shrink themselves to solvency.
• A simple relationship demonstrates the unsustainable position:
• Changes In Government Debt = Budget Deficit + [(Interest Rate – GDP Growth) X Debt]
• In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP growth exceeding interest rates or a budget surplus. EU/IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the state’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.
• Based on IMF’s best estimates, there is little prospect of many European countries returning to balanced budgets any time soon. Given the toxic conjunction of high cost of funding, low growth and high starting level of debt, it is near impossible for these countries to contain the spiral to a restructuring of their debt or default.

Language Lessons

• certitude: Noun
• Absolute certainty or conviction that something is the case
• oenology: Noun
• It is the science and study of all aspects of wine and winemaking except vine-growing and grape-harvesting, which is a subfield called viticulture.
• libation: Noun
• A libation is a ritual pouring of a drink as an offering to a god or spirit or in memory of those who have died.
• Sisyphean: Adjective
• Both extremely effortful and futile
• schizophrenia: Noun
• Any of several psychotic disorders characterized by distortions of reality and disturbances of thought and language and withdrawal from social contact