Tuesday, October 31, 2017


Traders are a smarter lot. They speculate and exploit each and every opportunity. Traders cannot be more thankful when the government gives them a reason to cheer. Sometimes rumors of imposition of higher import tariffs, intended to protect domestic producers and restrict cheaper imports, can also help traders in some ways. At the same time higher MSP meant to help farmers, gives an immediate advantage to the trade because market prices move up right away even through new crop will arrive in next April.
Wheat is a case in a point, where policymakers have been frequently fiddling with custom duty to regulate imports to maintain supply-demand balance. To be precise import duty has been changed seven times since August 2015. Thus, such a rapid frequency of tariff treatments give rise market gossip that is treated with a spark of truth.
A steady flow of wheat import during last three years by the private trade/MNCs caters to private demand of country—mostly in southern states—while the central pool managed by FCI from annual local procurement of about 23-33 million tons (mts) is stored, and then used for Public Distribution System (PDS). FCI stocks declined to about 8 million tons (mts) on 1st April2017 when buffer requirement is 7.5 mts.
Recently media widely reported that authorities are considering yet another hike—eighth alteration- in import duty from existing level of 10% to 20%-25%. The very speculation in anticipated duty structure has lifted the price of imported wheat—sourced mostly from Russia/Ukraine-- from Rs 17500/ton to Rs 18500/ton ex Tuticorin. It made importers smile with money in their pockets, because before this rumor mill, they were unable to dispose of imported stocks for want of parity—that is their landed cost was marginally higher than local values or they were fearing losses. Importers who either diverted or cancelled their wheat cargos on the basis of this hearsay may have regretted. (Reports of about 0.3mt having been cancelled/diverted are circulating in the market)  This surge by Rs 1000/mt will also assist local farmers, carrying old stocks, to sell grain at better values.
What gives further credence to this speculation is that Government needs to encourage more sowing of wheat by the farmers in this Rabi season on the ideas of realizing better market values for their crop next year (marketing tear 2018-19). Secondly wheat inflation is in the negative zone (see chart) for last four months—about minus 1.71 in September 2017-and thus additional duty will be virtually neutral to macro inflation.
New MSP of wheat has been notified at Rs 17350/ton—higher by Rs1100/ton from previous year.  If Government now actually inflates duty by 10% -- scaling it to 20%-- trade will factor in the MSP, raised by about 7.2%, that will elevate local prices also. For importers, tariff increase of 10% would be substantially offset by higher MSP and make imports during December2017-February 2018 viable.
It is quite possible that by December 2017, Government may again reduce duty to nil or revert  to 10%--the ninth time modification-- to once more facilitate import because trade is aware that maximum pressure on reduction in official stocks starts from December onwards because farmers are left with little grains with them.  Though government maintains 2017-18 production at 97 mts, some section in the trade peg output at 92-93 mts. Proponents of the alternative view foresee another import wave of wheat after December 2017 of additional 1mt—making it total of 2.2 mt in 2017-18. However, International Grain Council, London estimates that India might import 4 mt in 2017-18 against 6 mt last year)based upon its projection of annual wheat consumption of 100mt.
The fluctuating pattern of duty determination is amply suitable for MNCs (Multinational Corporations) rather than local importers who are India centric. MNCs can take an advance position at the origins—Russia/Ukraine/Australia etc.—at cheaper cost for forward months. In the event of disparity in local market directly when delivery period is approaching or if there is a non-viability in sale price triggered by tariffs—they can divert the cargo to nearby destinations like Bangladesh, Sri-Lanka, UAE, and Oman etc. MNCs also have expertise in hedging their position in international future stock exchanges like CBOT to minimize losses.
 Indian importers and flour millers lack both financial muscle and proficiency in hedging. In 2016-17 Indian wheat import was about $1.27 billion –Australia $525 mill; Ukraine$603mill, Russia$33mill; others 107mill. Trade expects much higher flows from Russia after December 2017 of 11.5% protein crop than from other countries.
OMSS price of Rs 17950/ton ex -Panjab costs more than Rs 20000/ton in southern states after accounting for freight and incidentals. Should international prices remain within $220 cif/mt or so, higher duties may not have the effect of blocking the exports. (see chart).
Government will do well not to release excessive stocks from the central pool in the market because FCI/agencies have to assure adequacy of reserves and buffer norms. There are reports of moisture stress in Rajasthan and MP in this Rabi season and attaining production of 100 mts in marketing year 2018-19 will be a challenge; and so will be the realizing procurement target of 33 mts next year.

Tuesday, October 17, 2017


The general perception is that gold and diamond imports are guzzlers of precious foreign exchange. This impression is totally misplaced.  If import and export of these items of last six years is analyzed, then the trend that emerges is that there is significant “value addition” when gold as jewllery is exported and rough diamonds are shipped out as cut and polished diamonds. (Data is collated from Gems & Jewllery Export promotion Council (GJEPC), sponsored by Ministry of Commerce.)
In respect of composite sector  (chart 1)consisting of import of gold bars, silver, rough diamonds, pearls etc. there has been consistent value addition since 2012 rising to 34% in 2016 and around 23% in 2017. Likewise if gold bar imports are considered in isolation, there is a steep value addition since 2015 touching 81% and at 104% in 2016 (chart 2).   $4.15 billion of gold bar imports of 2015 have yielded about $8.55 billion of exports; it equals net exports of $4.37 billion. With surplus forex earning by the precious metal and precious stone sector, notion of depletion or pressure in FX reserves due to their imports is erroneous. Infact gold jewllery/ polished diamond exports etc. are more than FX neutral. It could also mean that Indians household may be using a major portion of recycled gold instead of relying upon fresh imports.
Total value addition by gold jewllery and diamonds, pearls, precious stones etc. is about $26 billion in last six tears or averaging about $4 billion per annum of FX earnings. This is the result of skilled craftsman ship and efficient trading practices of import and exports where price sensitivity is at its peak. Compared to that average annual export of $4 billion of Basmati rice is highly water and labor intensive including the use of fertilizers—that is also imported.
Any policy action to restrict imports of gold/rough diamonds will have parallel effect in pulling down exports. Indian exports of gold/diamonds are about 13% of national exports in 2017 or about $35 billion (see chart 3). Thus there is a case for incentivizing such imports for more exports.  Here is a suggestion worth considering for the policymakers.--
At a time when Indian exports are sluggish, why not gold/diamonds import be linked to overall Indian exports!!  Trade and industry are looking for incentive to export. Conceptually all exports may be rewarded with a freely tradeable scrip (named as “gold/diamond certificate of import”) of 10% of each Indian exports in US dollar denomination. With about $300 billion worth of India’s current export, 10% scrips would be about $30 billion. Since gold/diamond imports are worth$30-$40 billion, such an entitlement will let earn the exporters some market premium of 5-7%, depending upon import intensity of gold bars and rough diamonds.  Custom duty on gold imports will then have to be made nil within one year of notifying this facility.
Such a “gold/diamond certificate of import” could be issued to the exporter by the bank through which export documents have been negotiated and payment for realized. (Those who are not able to able to import gold/diamonds by using such certificate may pay 20% “penal” duty for clearing their consignment.) This duty free import scrip may be submitted to custom authorities at the time of clearing gold/diamond consignments.
This mechanism will be self- regulating—as much as –when Indian exports increase, the value/availability of these scrips will also rise but their premium will come down –facilitating less costly imports of gold and diamonds. The value addition in gold jewllery/polished diamond export is more than sufficient to absorb this 5%-7% premium, though currently re-export is available on zero duty.     
The proposal is not a new idea but that existed in 1997-98, when the DGFT used to auction “special import licenses” for gold import on the basis of maximum premium offered by the bidders.  Currently nominated agencies, including prominent banks and select trading houses are importing gold. These agencies too will have to acquire these import scrips from the market. Dollar denomination of the scrip is suggested to lock the value so that stronger or weaker rupee may not affect the intrinsic value of import.
Recently there have been controversies under India’s FTAs with S. Korea and Indonesia that provided duty free imports-which perhaps led to some of imports of gold being diverted through these countries. If gold/diamond imports are made on the basis this certificate and duty reduced to nil, such issues will automatically cease to exist.
Right now, with 10% import duty and 3% GST, there is an arbitrage between prices abroad and Indian market-- that provokes unofficial and illegal channels of imports. The above suggested scrip will minimize that arbitrage and such activities.  
At a times when jobs and business opportunities are reportedly on the decline—this tradeable scrip will create a new market of traders/brokers/commission agents and importers that would be atleast  worth $1.5 billion in revenue to the benefit of exporters.
Gold/diamonds trade is supportive to the national economy, and internationally too Indian skills& craftsmanship in jewllery and diamonds are well recognized. Based on the evidence of imports and exports of precious metals and precious stones, this trade deserves to be encouraged holistically.   

Friday, October 6, 2017


Conventionally, Indian exports statistics of agricultural items include all plantation crops, meat, poultry, marine and dairy products etc. An analysis is made on the basis of data available from 2010 to 2016 of Agri-exports by “excluding” Buffalo/Sheep/Goat /Processed meat, Poultry and Marine items that falls in a grey area of terminology of real Agri exports.  Reason-- products of animal flesh cannot be deemed “agricultural items” by any stretch of imagination. (Dairy products are not excluded). Feeding animals for slaughtering is a case of industrial production of buffalos/sheep/goat/chicken rather than any farm related activity.
Offsetting meat/marine products is vital to measure the genuine exports of agro products rather than to be merely content with illusion of higher exports by including these items. Segregated data gives a reality check than a false sense of comfort.
As per the official data, farm exports climbed up as from $ 18 billion in 2010 to$33 billion in 2016—up by 83%, with a peak of $42-$43 billion in 2013 and 2014. (See chart 1)  Exports of meat and marine items have risen from $3.5 billion to $9billion from 2010 to 2015/ 2016—higher by 160% with a high of $10.6 billion in 2015. This is consistent with the emerging global trend wherein dietary preferences are shifting away from cereals and grains to consumption of animal product. The effective or net increase in exports of plantations crops and their products from India appears to be negative or marginal.
Agri -exports has been cited at 12-13 % of “total national exports” in 2015-2016. But they are infact about 9 to 9.3% in last two years when exclusion of meat/marine items is made. (See chart 2)That shows reduction in real Agri exports by 3.3% to 3.5%. Exports of plantation crops in India’s “total export” were 8% in 2010 and 9% in 2016—which shows negligible sustainable growth in exports except for the small blip of 10%-11% in 2012 to 2014.
Trend of rising Agri imports and falling rate of Agri exports (w/o accounting for meat/marine shipments) will soon make India a net importer of Agri products from vantage position of net exporter of Agri in next few years. Imports are at $21.5 billion while exports are 23.8 billion in 2016—a spread of barely $2.3 billion-- from highest spread of $19.6 billion in 2013. With sharply ascending imports of edible oils, pulses and now, wheat and sugar as well, the spread of $2.3 billion is bound to collapse.
Usage of products derived out of animal husbandry also implies that we are promoting inefficient production especially for export too. Buffalo meat requires 25 times feed for “edible meat”; pork 10 times and chicken 5 times input for output as food.  Water consumption for 1 kg beef is 15400 liters versus 1 kg rice at 2500 liters. One kg of sheep meat too requires about 10400 liters of water. Generally Indian rice production and its exports is flagged for copious water consumption but meat production is 6 times more water intensive than rice.   In terms of energy, 3 calories of energy are needed to create 1 calorie of edible plant material, whereas grain-fed beef requires some 35 calories for every calorie of beef produced. 
Global dietary trends continue to move towards high meat content. In China between 1981 and 2004, the annual per capita grain consumption declined from 145kg to 78kg in the cities, while over the same period intake of meat products rose from 20kg to 29kg per year. There is no denying that there is an ample demand of meat etc. in overseas markets but it requires to be debated whether large crops should be consumed for fattening flesh of animals for exports in preference to  population at home.
As per a report of Institute of Mechanical Engineers London, “The challenge is that an increase in animal-based production will require greater land and resource requirement, as livestock farming demands extensive land use. One hectare of land can, for example, produce rice or potatoes for 19–22 people per annum. The same area will produce enough lamb or beef for only one or two people”.
Let this analysis be understood objectively without relating to notion of vegetarian versus non –vegetarianism. Idea is to submit facts so that exports of plantation crops be incentivised;  meat/marine/poultry products may be classified as another category; efficient methods of crop production with better yields be promoted keeping in view the rising potential demand of grains/pulses/ oilseeds by understanding the limitation of land area and availability of water.
When primordial pursuit of man has been to attain higher efficiency economically in all spheres through scientific and ethical means- whether in energy production, automobiles, computers, trains etc.—why matters of consumption patterns of what is fed to human beings  are not being linked to  precious resources conservations!! That appears strange.