Saturday, March 28, 2015





Tejinder Narang

The recent budget proposals on gold monetization/loan and gold bond schemes will remain dormant like many other earlier attempts to lure Indian households away from accumulation of non-productive investments in precious metal.   Not because that these instruments/proposals are irrational, but for the simple reason that Indian DNA seeks possession of physical metal rather than paper gold. The metabolic craving for possession of yellow metal cannot be substituted. Gold in Indian psyche is a religion, faith, security, tradition and love that are irreplaceable. No family wishes to discuss or reveal any information for the fear of so called “bad eye”. (Nazar lag jayye gee) This mind set is immutable.
Though detailing of budgetary announcement is yet to be notified, monetization of family jewellery through a bank is unlikely to be even marginally successful for the fear of disclosures in public domain.

The same would be true for purchase/sale of gold bonds calibrated to marked- to- market prices and nominal interest rate of 1%-2%. Then there is an apparent distrust of Government from issuing one amendment after the other—be it from   RBI, DGFT or Finance Ministry. Assuming that official gold import are about 900 metric tons (Rs 216000 crores or $35-$36 billion) annually, Finance Ministry “estimates” selling gold bonds worth Rs 20000-Rs 40000 crores. This too amounts to highly presumptuous quantity of 85 to 170 metric tons. An estimate that varies or deviates by 100% evidences lack of professionalism and understanding of ground realities.
Custom duty of 10% will continue to be sore point in official imports. Imports in grey market will continue to sneak through, depending upon demand intensity and premium available locally.
 Tracking gold purchases above Rs one lakh ($1612) through PAN at retail level will also not work as traders/jewellers can issue bills of less than Rs one lakh five times to cover one purchase of say Rs 4-5 lakh and so on. 

Till 2013, or for about more than two decade, Government allowed unrestricted import of gold through banks and nominated agencies. Thereafter it experimented with cocktail of ideas of higher duty, export of jewellery and import of gold in 20:80 ratios, past performance basis etc. However collateral issues of smuggling, round tripping of jewellery, faking the CAD have cropped up.  When India is the world’s largest market of jewellery, insistence on 20% prior exports was inconsistent with the ground realities.
In this environment full of contradictions, ideally the government should maintain the policy prescription of 2011-12 with 2% duty through nominated agencies only.  Pressure for sugar coating CAD has withered owing to 50% fall in fossil fuel prices.  
But why not leverage bullion imports to promote exports of other items. India’s export is about $320 billion and at current prices precious metal import is about $ 40 billion.   Conceptually, bullion importers, including nominated agencies should purchase about $40 billion FX from exporters by paying a market determined premium. This premium earned by the exporter should assist competitiveness abroad, especially, when Indian goods/commodities are facing fierce downside price pressures.  Import tariff can be abolished.
All exporters are issued 100% Bank realization Certificate (BRC) by the Banks-- a documentary receipt—for having realized export proceeds against invoiced shipments.  All the finance Ministry/RBI needs to do is the following-- 
a)      Banks to issue “split” Bank Realization Certificate (BRC) in two parts-- first one say of 10% and balance for 90% of  exports proceeds of “any” commodity/equipment/services . 10% BRC to be issued in duplicate (one for the bank and the other for customs) and can be named as Bullion Bank Realization certificate (BBRC).  BRC for balance 90% can be issued as usual. (Exporters will continue to be eligible for export benefits on 100% BRC.)
b)      Indian exporter would have “discretion” to trade (sell) 10 % BBRC to any bullion importer/trader at a market premium by endorsement.
c)       Banks to open import LC for bullion import upon surrender of BBRC. Custom copy of BBRC can be submitted for clearance from airport.
d)      All banks may put data of availability of BBRCs with exporters on their website.
e)      For consignment imports, remittances can also be done on the basis of BBRC.
Premium on BBRC will vary virtually on daily basis based upon demand pull in domestic market. This will stimulate higher exports of Indian goods/commodities without any subsidization.  All nominated agencies and select trading houses will be at par with other importers who acquire BBRCs. BBRC premium will be billed to consumers.
Whether this will lead to elimination of smuggling?  The answer is-- if market premium is 6%-7% the possibility of unofficial imports is remote. If the premium on BBRC escalates, grey market operators will be back in business and that would moderate BBRC premium. The fluctuations in premium will be self-balancing, depending upon market conditions. Government can also decide the percentage of BBRC—whether 10%, 12.5% or 15% etc. to regulate the premium.

Monday, March 23, 2015




Tejinder Narang                                                                                   
The double digit decline in agro export has commenced in 2014-15 after consistent five years rising trend since 2009-10.  Export of Agro and allied items was $32 billion in 2013-14. It will taper down to about $29 billion-lesser by 10% in 2014-15. Difference of about $3 billion matters little to Commerce Ministry, when $50 billion is gifted to the Government by falling oil prices (India’s net oil imports being $100 billion). The contra fact is that when higher agro output is targeted with falling exports, it is an invisible and indirect taxation on Indian farmers due to demand compression.    Trading community too is nervous with continuation of this trend.
 Indian WPI is down to -0.39% in FY15 vs 5.39% last year. WPI of food articles has remained stable around 8% both in FY14 and FY15 while rupee has weakened by 10%. Thus export efficiency of India should have been pronounced even though marginally. But exactly opposite has transpired.  International commerce stands destabilized by strategic confrontations of big powers, creating deflationary shift in commodity price.

 World’s food demand cannot be compressed substantially.  Sharp fall in commodity prices is due to anticipated demand contraction of bio-fuels like ethanol and bio-diesel, produced through agro items. With 50% cut in crude oil values, ethanol’s (blendable with gasoline) demand will shrink significantly. One third of US corn production is currently dedicated to ethanol. That will taper down. Excess of corn will make it extra cheap.
 Likewise, sugarcane produces both sugar and ethanol. Ethanol from sugarcane will also be exposed to manufacturing cuts. More molasses will be diverted for greater sugar output than ethanol, triggering steep downward trend in sugar prices. 
Surely corn and sugar values are bound to melt down further, if crude oil +shale gas complex continues in sub $60 bbl. range.   Corn, wheat and soymeal are all also used for animal /poultry feed. If corn is down, it will induce resultant de-escalation in prices of connected items like wheat meant for feed, soybean.  Cheaper corn will be diverted more towards poultry/ livestock, thereby diminishing demand of feed wheat and bottoming out wheat prices.  The same holds true for soybean- cheaper soybean will imply lower soy oil and therefore lesser palm oil values.
Power play of big powers
Precipitous fall in petroleum prices to around $50/bbl are not a natural phenomenon of supply demand mismatch. Has demand evaporated by 50%? No. The supply of fossil oil is intentionally pressurised to surge by Saudis to destabilize certain regions. Even with extra shale gas from USA, prices could have ruled $80-90 bbl. The game of price rigging is orchestrated by USA and S. Arabia  for fighting unconventional war to hit economies and commerce of Russia and some Middle East countries. Stronger dollar owing to lower oil values and sanctions have depreciated currencies of India’s competing countries like Russia, Ukraine and Brazil.

At the same time ECB has decided to depreciate Euro through QE to prop European economy, making European goods inexpensive. Currency manipulation and deep depreciation in major currencies have disabled India’s prospects of exports (see chart) because rupee remains fairly stable. It is in the geo-political-economic game of big powers taking away slice of export business. The positive side is that India’s CAD has improved but the world is sure to face the convulsion of high volatility so long as ISIS, Iran and Ukraine matters continue to dominate world space.
WTO is a toothless body when it comes to reining global hegemonies’ designs of USA and Europe. WTO cannot question them as to why crude oil and currencies are artificially manipulated. It cannot check China for perpetually keeping Yuan devalued nor can it rein Thailand from selling rice at half the cost of procurement. Even Pakistan has announced wheat export subsidy of $55pmt from Government stocks.   It is time for Indian authorities to react to WTO for this discriminatory state of affairs. Indian export subsidies too should not be questioned so long as such an inequitable state of affairs prevails. 
Indian Government belatedly announced $64 or Rs 4000/mt as subsidy on raw sugar exports. Another export subsidy from Maharashtra Government of Rs 1000 or $16/mt for raw sugar is also being rolled out.  But doing business even with this (64+16)=$80/mt is still a challenge.    Logically Indian government should also subsidize wheat, corn, soymeal export, because WTO cannot intervene in crude oil and currencies going southward irrationally.
Wheat export from India—costing around $275 fob— has no takers from private sector.  According to Food Secretary, Government stockpiles will not be touched for export. The fact being India is in no position to export wheat unless subsidised by about $70/mt
All buyers are calling for French/US wheat at $200/mt fob ---with euro falling by 26% in last 52 weeks. Russian rouble is down by more than 138%. Russian wheat could be below $190/mt in next few months if temporarily imposed export tariff of $45/mt is abolished. 
Export figures of “agro and allied items” of January 2015 listed by Commerce Ministry are alarming with minus realization. Assumption that lower realization is attributed to fall in commodity prices may only be “partially” correct, because quantitative export of wheat, sugar, corn, soymeal, cotton etc. are insignificant this year. Net conclusion-- India is grossly out priced. 

Save the rot
Indian domestic demand of corn and soy is also amplifying which are also contributing to occasional disparity in international prices. Their yield and land area must go up. Simultaneously Indian establishment must not let hoarded wheat and rice rot in warehouses which are produced by expensive but subsidised fertilizer, scarce water, precious power, tractors and diesel, farm labour, amenable weather and above all utilization of valuable land, which is the heart of current controversy of Land Acquisition Act.  If the value of the grains/agro items are not realised either through market prices or through corresponding subsidization to attain marginal parity in markets abroad, authorities are just mismanaging the entire economy.