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The Indian Economy: The fairytale, which is in danger of losing the plot

From Faculty !s Desk

The year 1990 was a significant

milestone on the road of India’s

economic growth. Since the economic

reforms of 1990, India has been growing

at a rapid rate. The years 2005 to 2008

were some of the most exciting in our

country’s history. India was growing at

rates of around 9 per cent, making it

the second fastest growing economy in

the world and triggering hopes that we

would soon break past the magical

double digit barrier.

2008 was another marker in our

economic history-this time however it

marked the beginning of a slow and

painful regression of our economy. The

Indian growth engine, instead of

shifting into the next gear, is grinding

to a shuddering halt. The IMF growth

forecast for India in FY 2014 is hardly

inspiring at a figure of 5.6%.

There are several reasons for this sudden

change in fortunes in the growth story

of India. The global environment is

deteriorating and is volatile. This has

had an adverse impact on trade and

capital flows as well as the external

value of the rupee. Domestically,

inflation and in particular food

inflation, has proved to be a stubborn

adversary. The corporate sector did not

have much to cheer about either as the

period was marked by tight monetary

policy and high interest rates.

Politically, the situation was unstable

and the government has lost credibility

with civil society bringing decision

making to halt by accusing the

government of corruption. The hazards

of coalition politics became apparent

and regional political powers did not

allow the government to adopt any

significant policy reform, thus resulting

in what is today known as policy

paralysis. The same investors who were

singing India’s praises a few years ago

Dr. Sangita Kamdar

Area Chairperson,

Economics,

NMIMS, Mumbai

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E COSHASTRA A

are now the first to dismiss our

economy.

Compounding the issue are problems

such as the ever-increasing chasm in

our current account deficit. With

industrial production coming to a

standstill and our reliance on imports

growing, this gap has been growing ever

wider. Our insatiable desire for gold is

leading us down a dangerous path and

the government is trying hard to curb

this demand. Ben Bernanke is not

helping matters either. Since the time he

announced that the US would cut back

on quantitative easing, the Indian

rupee has been in free-fall with the RBI

having to intervene to arrest its fall.

Another contentious point is the populist

reforms, which the government is

implementing in the run up to election

year. While it may have good intentions

there are several structural issues, which

suggest that, it may be severely flawed.

The Indian growth story, which

promised so much, has seemingly lost

the plot. All hope is not lost however.

There exist deeply rooted structural

drivers of economic growth. We are a

young nation. The average age of our

citizens is a lot lower than many of the

developed nations. The disposable

income of the Indian citizen has been

growing. This coupled with the vast

domestic market has propelled India’s

growth even during the global recession

period. The levels of poverty have

significantly improved and economic

benefits have been felt even at the base

of the social pyramid. The question that

remains is whether these factors are

sufficient to bring the country back on

the path of high growth. Perhaps not. It

is one thing to have a young population

but it is another to have a young,

trained population. The need of the

hour is widespread education and that

too quality education. An environment,

which is favorable for investment in the

domestic industry, needs to be created.

There are issues such as access to land

and natural resources, which are

causing major holdups in various

industries. Policy measures to address

these pressing issues are needed. We

have been found wanting in areas such

as investment in infrastructure and the

speed with which administrative

decisions are being taken. A lot needs to

be done to improve in this regard. It is

time for our government, and for

whichever government comes into

power, to take hard decisions. Fiscal

consolidation will only be achieved if

the government is ready to take a hard

stance.

In summary, all is not lost. There are

strong indicators, which show that we

can bounce back from our present

predicament. We need to back our

strengths. The country is in need of a

policy agenda, which is based on

economic considerations and is investor

friendly.

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CONTENTS

EcoNMist Article by Senior Committee 2013-14

CORPORATE INTERVIEW

!

COVER STORY "#!Suhasini Kirloskar

Is the Dragon !s fire incinerating the Elephant?

Mr. Narendra M.

Murkumbi

Managing Director & Vice Chairman of

Renuka Sugars Limited

Lets try and keep this private !

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AMAZING

FACTS

G !30

!32 High Growth Trajectory: The FDI

and The Uncelebrated Savers

The Food Security Bill : Vote bank Politics or A Game Changer? !

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Take the Leap of Faith !

SOLUTION

ECODOODLE

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E COSHASTRA

AUGUST 2013

EcoNMist

The total estimated coal reserves in the world

are about 860 billion tonnes. With energy,

power and various other dependent sectors

worldwide growing at breakneck speeds, the

demand curve for coal has always been on a

steady rise. The supply on the other hand

has been unable to keep up. Moreover,

governments have had to lay down stringent

environmental regulations as a result of

which the production targets have fallen well

short of demand from various sectors. The

gap has been steadily increasing.

Of all the primary sources of energy, coal is

the most extensively used one in India. This

trend is expected to continue. The power

sector is the largest consumer of coal

followed by the iron and steel and cement

segments. The demand for coal in FY 2012-

13 was 696.03 Million Tonnes (MT) while

supply was only 534.53 MT. As per the 12th

Five Year Plan the estimated demand of coal

in 2016-17 is 980MT while the supply has

been pegged at 795 MT. Fast forward to

2021-22 and the demand and supply are

expected to rise to 1373 MT and 1102 MT

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Let !s try and keep this Private !

respectively. Clearly there is a shortage.

This leaves organizations no other choice but

to source from abroad. As a result of this the

annual rate of coal imports has been growing

at 22%. On the one hand there is pressure to

spur growth. On the other, there is pressure

to minimize the Current Account Deficit and

maintain price levels. There is need for an

equitable solution.

Are there substitutes that could be imported?

As can be seen from the table, coal is a much

cheaper alternative when compared to other

options. Moreover a large percentage of

consumption of Oil and LNG is already

imported. To meet the demands of various

sectors, coal as an energy source appears to

be the only feasible option.

On the downside however, with the

imbalance in supply and demand, the prices

of coal are headed in one direction only – up.

Another point of concern is that the cost of

internationally traded coal is considerably

higher than domestically available coal. This

would have an inflationary effect on all

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ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

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affected sectors which in turn would lead to

slowdown in growth. Moreover the country

cannot afford to have further strains on its

already burgeoning Current Account Deficit.

It appears therefore that the most viable

option for the government would be to look

within and turn to the private sector.

Presently private participation in the coal

sector is restricted to captive mining and

contractual operations. The concept of

captive mining was introduced in the 70s

when coal production became nationalized.

Up until the 70s, the coal sector mostly

comprised a mix of small and big mines with

most of them under the control of private

players. Due to mismanagement, no

forthcoming investments and an extremely

low annual growth figure of 2%, the

Government passed the Coal Mines Act in

1973 with the purpose of nationalizing the

sector. Barring the mines under the control of

Tata Steel Ltd and one or two major players

at the time, the remaining mines were

brought under the government’s control. In

1976 companies like Tata Steel were allowed

to captive mine i.e. they were allocated a

block or an area within which they were

allowed to mine. They could then use this

block to cater to the needs of the steel

industry exclusively. The allocation of blocks

was done based on the sector’s end-use

requirements and the technical capabilities of

the private company (the 1973 Act was

amended in 1993 to expand captive mining

to the power generation sector. It was further

modified in 1996 to include the cement

sector). The rest of the sector was broadly

divided among two public companies!

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AUGUST 2013

Given below is the production history since that decade:

As can be seen from the figures, there has

been considerable growth under

nationalization. But of late the figures seem

to be stagnating. Unfortunately this

stagnation is occurring at a time when

demand is peaking. Compounding the issue

are events like the 2012 blackouts which was

the largest power outage in history. All this

suggests that changes are the need of the

hour. There is a need to bring in new

technology and mining methods to improve

current productivity. Following are the areas

which need to be looked at:

! Exploration

The Working Committee Group of the

Planning Commission stated that in excess

of 4000 sq. km. of area remains unexplored.

It is not feasible for a body such as Coal

India to explore this entire area by utilizing

only its own resources. The technical

expertise of private companies could be

leveraged here. The exploration of these

mines could be outsourced. There is a large

possibility of finding suitable mines in such a

large area. They could then be developed

and utilized and in the process reduce the

pressure on coal imports.

! Improving technology of currently

existing mines

While it is necessary to explore further, it is

equally if not more important, to try and

maximize the productivity of already existing

mines. Private companies would bring to the

table deep pockets, human resource and

technical knowhow. They could contribute

towards increasing the efficiencies of the

processes and boost levels of output to meet

demand and hence reduce reliance on

imports. Alternately the expertise of private

companies could be used at various levels of

the supply chain.

! Finances

In India FDI for setting up power projects and

coal mines for captive consumption is allowed

up to 100%. However, given the current

industry trends, global economic pressures

and lack of private participation, the sector

has seen limited investment.

This figure (table on the next page) amounts

to only a fraction of the total FDI inflows into

the country. So where is the money going to

come from?

Commercial Bank Lending is one option. The

other option would be to turn to the private

Let’s try and keep this Private

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ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

sector and enter into a Joint Venture or Private

Public Partnership Model. There is already a

Mine Developer cum Operator or MDO model

in place. This is similar to a contract model

wherein the MDO finances the start up costs

while the PSU focuses on the end requirements.

The MDO alternately provides equipment or

brings technical capabilities to the partnership.

This model could be promoted and the

incentives need to be made more attractive to

private players. The main advantage of this kind

of contract model is that it would ease financial

pressures. PSUs would not have to buy and

maintain expensive equipment or hire labour.

As can be seen there are a fair few advantages

of calling for the private sector’s aid. Not only

would it help improve productivity it would also

level the playing field. There would be more

players and this would make prices more

competitive. It would reduce the Current

Account Deficit considerably and would reduce

the number of stalled projects thus contributing

towards growth.

All this sounds quite rosy, too good to be true

even. Surely there are pitfalls? There are, in

fact, some strong arguments to prove that

privatization is not always the answer:

1) If history is any indicator then privatization

does not seem like a very good option. The door

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to the power sector was left open for private

players. Although they entered, they seem to

have slipped on their way in and some

companies are now in need of financial

bailouts.

The power sector was opened to private

companies in 2002. In some states like Delhi

there has been no significant improvement.

Between 2002 and 2012, the power generation

capacity has risen from 995 MW to 1047 MW,

a rise of only 52 MW. Demand on the other

hand has spiked to 5500 MW. In order to meet

the gap private players have had to buy from

other states or standalone power generation

firms. A similar trend might follow in the coal

sector. Private players might be plagued by the

same problems which are being faced by the

PSUs and there is no guarantee that

privatization will bring about a drastic change.

Another pertinent argument is that a fairly large

percentage of the regions which need to be

explored are Naxal dominated territories. This

questions the merit of the suggestion that

privatization will lead to higher levels of

exploration.

2) Detractors of the move for privatization say

that Coal India Limited has had the raw end of

the deal. They are of the view that CIL is, in

fact, competent to meet India’s demand

requirements. It is the government which is

hampering its progress. Given below are some

of the project details of Coal India Ltd.

What the table shows is that if the government

laid more focus on giving clearances to

projects then they would not have to turn to the

private sector. Coal India seemingly has the

capabilities to increase its production levels

and reduce the gap between supply and

demand which currently exceeds 150 Million

Tonnes.

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AUGUST 2013

Given below are some of the project details of Coal India Ltd.!

3) There is always the possibility that some

players might buy rights to the mines but then

sell them off to bigger players. Moreover the

power sector has the most subsidized rates.

Private companies, in order to generate profits

might choose to avoid this sector in favour of

other, more lucrative ones like the iron and

steel sector. Unless there are firm regulations

in place private companies will supply to

sectors which suit their requirements. A strong

auditing body will have to be set up to monitor

and regulate the private players. Another

apprehension among Left wing politicians and

labour unions is that introducing private players

will slowly lead to the privatization of Coal

India. Their fear is that this would lead to a

loss of jobs.

In theory the proposition of making the coal

sector private does sound inviting. There are,

however, convincing opposing viewpoints to

the move. It remains to be seen as to what

steps the government will finally take to tackle

this problem. Is the sector ready for

privatization? Has the government learnt from

past errors with the power sector?

One does hope though that with the coal

sector, the government decides to ‘try and

keep it private.’

Article by Senior Committee 2013-14, Ecolibria

Anirudh Kowtha – MBA (Core), NMIMS – 2012 -14

Krishnakumar Subramanian – MBA (Banking), NMIMS – 2012-14

Let’s try and keep this Private

References

Indian chamber of commerce coal report-

The Indian coal sector:Challenges and future outlook

Govt of India-Ministry of Mines report on fdi in mining secto

Livemint article-Government approves bailout plan for power, roads Fri Jun 21, 2013

References

Indian chamber of commerce coal report-

The Indian coal sector:Challenges and future outlook

Govt of India-Ministry of Mines report on fdi in mining secto

Livemint article-Government approves bailout plan for power, roads Fri Jun 21, 2013

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&

Business standard article: Will privatisation help fire up the coal industry? , January 15, 2013

Financial express article : A private tinge for coal sector via equity tieups , Jul 15, 2013

ET article : Montek for coal sector privatization , Jan 4, 2013

ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

COVER STORY

For young Indians who are entering the

professional world today, what exactly is the

unique place that they can carve out for

themselves? This question is related to the

question of India itself, what is her space in the

world today? Let’s examine these two

questions to develop a vision of the great things

we can achieve in the future.

Our country is at a unique juncture today, and

we can sense that we are at the threshold of

something big but are being held back from

taking that leap of faith. The heady days of

aiming for double digit growth (which was a

tantalizing possibility a few years ago), now

seems like a distant memory. While our country

seems to be floundering currently, we have

come a long way since independence. We need

to look back over our shoulders at the road we

have taken and decide the course for the future.

The Indian economy was largely a closed and

controlled one from the 40s up until 1990. You

may have heard your parents tell you that there

were only 2 models of cars on the road! Today

there are more than 50 automobile brands on

Indian roads. Owning a landline telephone

was considered a luxury. These things may be

quite hard for the present day Indian to

imagine, who is spoilt for choice.

India’s economy in those decades was

influenced by socialist principles. Post World

War II, the Soviet Union appeared to be

present an economic model and Jawaharlal

Nehru sought to lay down the same

foundations which the Russian economy

rested upon. State controlled industrialization,

central planning and licensing was the norm.

The idea was to generate a pattern of savings,

believing that this would lay the foundation for

growth and to help the country revive from

colonial rule.

In reality though, the conditions were not

conducive for private industry and enterprise

to flourish. As an example, Bajaj Auto Ltd was

given a license to produce only 20,000 two

wheelers a year, a control that Mr Rahul Bajaj

challenged, saying he was ready to even go to

Suhasini

Kirloskar

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Take the Leap of Faith

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AUGUST 2013

jail for the excess production of a commodity

that most Indians needed.

While Indian entrepreneurs were stifled in this

manner, international competition too was

restricted from entering the market. The Indian

consumer was simply left with no choice.

I sometimes imagine that if in those days, one

would have asked international economists or

investors, “What do you think about India?”,

their answer may have been something like, “I

don’t think about India.” We were simply not on

the world’s radar.

This left one wondering as to how India was

planning on growing. How were our leaders

planning on bringing India on the global map?

India’s was growing at a pedestrian rate in that

era. In 1950 India’s growth was about 4% and

was predominantly reliant on agriculture.

Agriculture’s contribution to in the FY 1950-51

was 55% of GDP and close to 75% of the

workforce.

By 1991, it became apparent that the economy

could not continue in this manner. Reforms

were forced on us after the 1990-91 external

payments crisis. When the government finally

adopted liberalization in 1991, our lives

changed. Private enterprise began to flourish.

The previously suppressed entrepreneurial spirit

of Indians finally found scope to grow.

By 1993 there were no quantitative restrictions

on manufactured capital goods. The tariffs on

manufactured goods were reduced from 76.3%

in 1990 to 42.9% in 1992. Opening up the

economy opened up avenues in the job market

which led to a higher disposable income of the

average Indian. Per capita spend slowly began

to rise and the Indian citizen began to adopt a

spirit of consumerism. People who previously

did not have access to products and services

now became consumers. They were not

restricted in terms of options either. By 2001,

10 years after the reforms began, restrictions

on manufactured consumer goods were lifted.

The demographics of India when compared to

the rest of the world at that point of time proved

to be favourable as well. European and

American markets were beginning to saturate

and some were even on the decline. Growth

was beginning to stagnate and maximum

penetration had been reached in these markets.

Moreover, European and American citizens

were getting older and manufacturers were

facing the prospect of slowly losing customers.

They began to seek access to new markets and

new geographies.

In a category such as automobiles, whereas

only 7 Indians out of every 1000 owned a car,

500 out of every person in Western Europe

owned one. This led companies across the

world to believe that there was a huge,

untapped market opportunity in India.

A similar trend followed across all categories of

products and services. The developed

economies saw India as an exciting

opportunity. The caged tiger that was the Indian

economy was slowly breaking its shackles. The

purr was building up to a roar.

Our reliance on agriculture also reduced. While

in the 1950s, agriculture’s contribution to GDP

was about 50%, the number reduced to 17% by

(

Cover Story – Take the Leap of Faith

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THE ECONOMICS CELL NMiMS, MUMBAI

2008. This is an indication of how far India had

grown in terms of industrialization.

Buoyed by this optimism, we began to grow at

figures of 8 to 9% for a sustained period of

nearly 5 years from 2007 till about 2012. At

one point in 2008, the Sensex touched 21000

points. In 2010, India’s trade to output ratio

was 46.3%, a dramatic rise from the figure of

15.7% in 1990. Those were definitely heady

days. A Mckinsey report said:

‘Income levels will almost triple. India will be

the 5th largest consumer market by 2025. Over

291 million people will move from desperate

poverty to a more sustainable life. By 2025,

over 23 million Indians, which is more than the

population of Australia, will be among the

world’s wealthiest citizens.’

Investors were pinning their hopes on India’s

growth story and companies were eagerly

trying to enter into our market and establish

themselves. According to development reports,

India, China and Brazil were projected to

account for 40% of global output by 2050. The

roar was now loud enough for everyone to

hear.

Coming to 2013, however, we see a very

different picture. The tiger now seems to be

withdrawing back into its cage. Investors who

not too long ago were knocking at our door are

now beating a hasty retreat. The extent of

negativity towards India is shocking and

depressing. The country at the moment is

lacking credibility and there is no faith in the

existing policies. When giants like Arcelor

Mittal decide to scrap their plants in parts of

the country, then you know that something is

amiss. The figure of 6.5% growth now seems a

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AUGUST 2013

distant possibility.

The environment is not ideal and poses a

challenge for all of us. This does not necessarily

mean there is a dearth of opportunities today. If

the world is changing, we may need to change

our approach as well. The first thing that we

should keep in mind is that we should not fall

prey to hype cycles. Bubbles while pretty to

behold, take only the slightest touch, gust of

wind or dust particle to pop. It is therefore

imperative to understand that we cannot remain

insular in our environment. We must look at

ourselves not in isolation but as part of a larger,

interconnected system.

The second thing we should do is to look

beyond economic indicators. The ugly truth is

that while we were growing at 9%, we were not

performing well on human development indices.

The 2013 UN Human Development Report

portrays a sad picture on many different

indicators. . Some of the more humbling points

of the report are:

• The average life expectancy of a newborn

child in India is lower than a child born in

war torn Iraq

• Overall in the human development report we

are 136th out of 186 countries

• Our neighbors Sri Lanka, Bangladesh,

Nepal and Pakistan are performing better

than us on many development indices

• Education and literacy figures are poor

So for young people in India today, I believe the

time has come to think differently. The young

generation has to think radically, going beyond

even the vision of Mr Narayan Murthy and Azim

Premji. The time has come to focus on our

development and social indices.

Where we fare poorly on development

indicators is exactly where we offer

opportunities for improvement and enterprise.

There are opportunities in areas such as

healthcare, education and sanitation that will

affect the country right at its roots. If you can

find a way to really change the lives of people,

the monetary and business model will fall into

place. Take the example of the recent

Uttarakhand tragedy. Such a catastrophe could

have been avoided if significant investment of

resources and capital had been made to

strengthen our warning systems and research

equipment. These are areas which remain

ignored and are a clear opportunity for us.

There seems to be a basic flaw in our

assumption that technology is beneficial only if

there is an immediate reward of dollars through

its use. Our technological prowess cannot be

directed only towards creating IT systems for

foreign clients. Can we not look inward and try

and capitalize on our immense intellectual

capital to improve the developmental indices of

the country?

Young Indians today need to have a vision of

what is possible if a sustained economic model

is built on improving our development indices.

The world is looking to the next generation for

solutions in the areas of education, health,

sanitation and infrastructure. There are a

number of organizations that are willing to

recognize, support and reward entrepreneurs in

these fields. Initiatives such as the Mahindra

Rise program, the Graduate Entrepreneur

program run by UK Trade and Investment, the

Bill and Melinda Gates Foundation and the

Stanford Ignite program are meant to produce

entrepreneurs in this direction. The tools are

laid out for you. It depends on how you use

them. The next generation needs to take a leap

of faith. So let’s get out of our comfort zones

and make this country as great as she deserves

to be.

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Cover Story – Take the Leap of Faith

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About Suhasini Kirloskar

Suhasini Kirloskar, an alumna of the NMIMS batch of 1989, works with UK

Trade & Investment as Director, British Trade Office, Pune. In this role, she

promotes UK and India partnerships in the areas of business, education and

R&D. Prior to this, Suhasini had her own consulting company where she

consulted Indian as well as international companies on marketing strategy and

corporate communications. She has also consulted overseas companies to help

them create and execute India market entry strategies. Besides this, she has

also authored a number of articles and spoken at a number of forums, as well

as visited B-schools around the country as a guest lecturer.

When she is not donning her corporate hat, Ms. Kirloskar dabbles in art and

writes graphic novels for kids.

All views expressed in this article are Ms. Kirloskar’s personal views.

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Corporate Interview

Mr. Narendra M.

Murkumbi

Mr. Narendra is Vice Chairman & Managing

Director at Renuka Sugars Limited. He

trained as an Electronics Engineer and then did

his MBA from the Indian Institute of

Management, Ahmedabad in 1994. He co-

founded Shree Renuka Sugars Limited and in

the last 14 years, the Company has become a

fully integrated sugar manufacturer, which also

has large power generation, ethanol and sugar

refining capacities

Team Ecolibria – What role does sugar

industry play in building Indian Economy

and what is the current scenario of sugar

industry in India?

Mr. Narendra – In population terms, India

remains a rural economy; Of the 1.2 billion

total population of India, 69% resides in

Rural areas. Out of the people staying in

rural area a total of 129 million farmers, of

which about 6 million farmers (4.6%) are

engaged in sugarcane cultivation. The sugar

industry provides a large revenue source to

growers with annual payments of Rs.

65,695 crore (US$ 12 bn) in 2012/13 which

is approximately 9% of total farming GDP.

The industry is used as a channel for loans,

technology and banking services to farmers.

As it has to be located in close proximity to

the sugarcane fields, the continued

development of the Sugar Industry would

foster further rural growth and provides high

skilled jobs through the process and

manufacturing technologies employed. The

industry fosters economic development

through provisions of schools & healthcare

facilities

Besides supplying sugar to the Indian population,

sugarcane is also used to produce ethanol and

electricity.

Team Ecolibria – What are the effects of

government regulation on sugar industry? (wrt

pricing, exports, imports etc)

Mr. Narendra –

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THE ECONOMICS CELL NMiMS, MUMBAI

Before partial de-regulation

• Mills suffered from regulatory release

mechanism whereby quarterly quotas

were given to sugar mills in order to

sell their produce

• Mills had to supply 10% of sugar

produced to public distribution system

(PDS) at a subsidised rate of Rs.

18.5/kg much below its cost of

production

• There were quantity restrictions on

import and export of sugar

• Post Partial De-regulation

• Regulated Release Mechanism of

sugar by mills dispensed; the move will

lead to timely payment of cane price to

farmers

• Obligation to supply sugar as levy on

mills at a control rate for Public

Distribution System (PDS) done away

with & requirement of sugar for PDS to

be procured by states through open

market

• No limits on quantum of sugar for

import & export but there is currently

15% import duty whereas no duty on

exports

• The current system of dual fixation

(central and state) of cane prices

would continue but it recommended

that cane pricing move to a system

based on sharing returns from sugar,

bagasse and molasses between

farmers and mills

Team Ecolibria – What is the impact due to

concept of levy sugar on the industry as a

whole and on profits of the company?

Mr. Narendra –

• Obligation to supply sugar as levy on mills

at a control rate for Public Distribution

System (PDS) done away with &

requirement of sugar for PDS to be

procured by states through open market

• Present sugar quota of states to be

protected and States mandated to

continue with the current retail issue

price of Rs. 13.50 per Kg. under PDS.

• States to be given subsidy for the

balance amount between retail issue

price and the current ex-mill price

calculated provisionally at Rs. 32/- per

Kg.

• Removal of levy sugar would save the

industry about Rs 3000Cr per annum

and our company to the tune of Rs. 80

crores

Team Ecolibria – How is the situation in India

different from what it is in Brazil?

Mr. Narendra –

There are differences both at the farm plus mill

levels as well as on the policy front as

highlighted (table on the next page)

Team Ecolibria – When the overall sugar

industry is facing losses, how does Shree

Renuka Sugars sustain in such a difficult

scenario?

Mr. Narendra –

• Strategic Locational Advantage and

Nation-wide Presence –

o SRSL’s presence in the progressive

sugarcane states of the country,

o its port-based refineries providing

ease of imports and exports and

• Integrated Business Model to manage

Industry Cyclicality –

o High level of Integration enables

better earnings stability in the

business during different phases of

sugar cycle;

o Strong demand for Ethanol in future

due to requirements for the National

Fuel Ethanol Program (current 5%

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E COSHASTRA

AUGUST 2013

blend in petrol going up to 20% in

future),

o Cogeneration Capacity of 272 MW with

surplus of over 139 MW of saleable

energy

• Refining Operations Support Sustainable

Operating Profitability –

o Only sugar company in India with port-

based standalone sugar refining

operations,

o Covers the fastest growing sugar

consumption regions of the world,

o Strategic advantage being on both the

east and west coast of India,

o High quality ports capable of handling

large bulk as well as containerized

volumes,

" Lower transportation costs as

compared to land-locked refineries

(almost Rs. 3,000 per ton),

" Proximity to both high consumption

export (middle-east and south-east

Asia) as well as domestic (Northern,

Western, North-eastern and Eastern

India) markets,

" Flexibility to take advantage of

domestic sugar demand-supply

balance,

" Ability to import raw sugar and supply

refined sugar in domestic market in

the event of sugar deficit in India,

" Ability to procure raw sugar

domestically and export white sugar

internationally in the event of sugar

surplus in India

" Strong Operating Track Record with

Efficient Operations

" Leading to Consistent Revenue

Growth, While Maintaining

Consistently Profitable Operations

Team Ecolibria – In your opinion, what are the

initiatives that need to be taken by the government

and ISMA to boost the sugar industry?

Mr. Narendra –

• Cane Pricing Mechanism: It is required that

"$

Corporate Interview – Mr. Narendra M. Murkumbi

!

! !

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THE ECONOMICS CELL NMiMS, MUMBAI

State Governments to ensure a

progressive cane pricing policy in line with

global practices wherein the sugar cane

price is linked with revenues from sugar

and by-products. Following the

recommendations of Dr. C Rangarajan,

Maharashtra and Karnataka are on the

verge on framing such a policy whereby

farmers are assured 75% of the returns

from sale of sugar and by-products (70%

if the mill sells only sugar).

• Ethanol Blending Policy: Government

must play a stronger role in ensuring fuel

ethanol blending in the country starts on a

firm footing. The policy measure has the

potential of reducing India’s fuel imports

and managing the widening current

account deficit that the country is facing

currently. ISMA can emphasize on the

benefits of ethanol in fuel viz. reduced

carbon footprint, renewable clean energy

source, reduction in GHG emissions,

ability to use the fuel without any

modifications required in vehicle, energy

security to the country

• Fostering Cane Research and

Development Program: Investments need

to be made to improve the productivity of

current land and research to increase the

productivity of land along with sugar

recovery. There need to be continuous

focus on knowledge sharing with other

major producing countries like Brazil,

Australia, Thailand etc. And good

practices need to be bought from those

countries to India

Team Ecolibria – How can India leverage

technology adoptions to increase sugarcane

yields?

Mr. Narendra –

1) Technology adoption can be adopted

to increase the forecasting of cane

crops, yields and output for better

price discovery of the raw material.

2) Also, mechanical planting and

harvesting can be adopted to increase

the efficiency and also reduce the

dependence of manual labour for cane

cutting.

3) SRSL has adopted Cane Tabs for its

on-field Cane Supervisors that helps

provide real-time data and

management reports regarding

sugarcane acreage, yields and age of

cane so that it can schedule the

harvesting across its registered area

to maximise yields and recoveries

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AUGUST 2013

Team Ecolibria – How has rupee depreciation

affected Shree Renuka Sugars?

Mr. Narendra – For Renuka, we are net

foreign currency earners on account of value-

addition in our refineries. However we do suffer

from high hedging costs of our imports as well

as on our overseas borrowings on the Indian

balancesheet. However the depreciating

currency is making our refineries more

competitive in cost compared to other

refineries in the region.

Team Ecolibria – What is the contribution of

sugar industry by-products to the overall

profitability of Indian sugar mills vis-a-vis

foreign companies?

Mr. Narendra – Given the pressure on sugar

margins , ethanol and power are critical to the

survival and sustained profitability of the

business in India. Indian sugar industry can

now claim to be in the forefront of tight

integration in production of all three co-

products.

While Brazil has pioneered the production and

use of ethanol as a fuel, the level of

exploitation of by-products in other countries is

not as high as in India.

Team Ecolibria – What is your take on the

future outlook of sugar industry?

Mr. Narendra – The sugar industry is poised

for better times with deregulation of the sector

effective from this year onwards. The vicious

sugar cycle of alternating high and low

production should ease off now that the

industry is able to flexibly able to manage its

price risk and cashflows. Reform in cane

pricing would make sugarcane farmers the true

partners of the industry leading to predictable

earnings for both. Demand is poised for steady

growth to keep up with the growing

consumption needs of our country.

With the current deregulation and freer

environment, it seems Indian sugar

sector is gearing for surge in M&A

activity, big investments including FDI

and consolidation of the sector.

"&

Corporate Interview – Mr. Narendra M. Murkumbi

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ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

"&&&&&&&&&"'

CROSSWORD !

!

Top-down (superscript)

1. The economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country(12)

2. Value of the best alternative forgone (11,4)

3. ____ is present when future events occur with

measurable probability (4)

4. Synonym for prize, bonus, reward, bounty (7) 5. The term first used by Keynes for consumer

confidence (6,7)

6. Planning commission is an _______ body (8)7. Middle name of the author of the book The

General Theory of Employment, Interest and Money (7)

8. Recently, 100% FDI has been approved for this

industrial sector (7)

9. An environmental tax which is imposed on products which utilize materials which contribute to greenhouse gas pollution known as _____ tax (6)

10. When a government/ business spends more in a given period of time than they generate in income, they incur a _____ (7)

11. One of the proposals of the _____Woods conference was that currencies should be convertible for trade and other current account transactions (7)

12. A very early school of which likened the interactions between different sectors and classes of the economy, and the monetary flows between them, to the circulation of blood through the human body (10)

Left -right (subscript)

1. The exclusive possession or control of the supply, an American-originated board game (8)

2. Goods are those which cannot be provided to one group of consumers, without being provided to any other consumers who desire them(6)

3. Tax imposed to stimulate more domestic production of the product in question (6)

4. Association of independent firms for the purpose of exerting some form of restrictive influence on the production or sale of a product (6)

5. Green Gold: The empire of ___ (3) 6. A statistical measure of inequality. Score of 0

implies perfect equality and score of 1 implies perfect inequality, known as ____ coefficient (4)

7. The father of economics (4,5) 8. Someone who benefits from resources, goods,

or services without paying for the cost of the benefit (4,5)

9. A form of trade in which one good or service is exchanged directly for another (6)

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AUGUST 2013

UPFRONT

Nitesh Sinha IIM Ahmedabad

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!! !

"#!

Is the Dragon !s fire

incinerating the Elephant?

India’s Current Account Deficit (CAD) has

climbed to 4.8% of the GDP or about $18.1

billion for the January-March quarter of 2012-

13. The magnitude of the situation can be

assessed from the fact that India’s average

CAD between 1949 and 2012 is $1.5 billion.

As is evident from Figure 1, the situation has

been deteriorating since Lehman’s ceased to

exist. The situation is so precarious that it is

being suspected that Balance of Payments

(BoP) may have to be cleared using forex

reserves.

What is to blame for this menace? It is the

general opinion among industry and

government circles that gold imports are the

culprit. India is the largest consumer of the

yellow metal (about 25% of world production)

and this trend has continued in spite of rising

prices of the precious metal. The volume of

gold exports has registered only a modest

growth, a CAGR of 6.27% between 2006-07

and 2011-12. In fact, the gold imports

declined in the fiscal 2012-13 by 11.8% in

volume terms. But it is the price of gold that

has become the cause of much damage.

Table 1 shows the gold import trends in the

past 10 years.

But a careful analysis of Figure 1 shows that

India’s CAD began to increase 2008-09

onwards, a time when gold imports were the

lowest (as percentage of imports) in a

decade (see Table 1). Then what has been

!"#$%&'()'*+,"-./'012'34&%'56&'7-/5'(8'9&-%'

China has witnessed massive

growth in the past three

decades. It is suspected to

surpass US’s GDP (in PPP

terms) by 2016. Essentially, the

nation is in the latter half of its

journey towards being a

developed country.!

ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

"$!

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the cause of increasing CAD? The answer-

increased world oil prices and India’s increasing

manufacturing trade deficit, especially with

manufacturing strongholds like China, United

States and Germany. Figure 2 provides us with

the information that India’s trade deficit began

to increase from 2008-09 onwards, the same

period since when the CAD began to increase.

Let us consider the case of oil imports and

exports. Between 2011-12 and 2012-13, the net

imports of crude and petroleum related products

has increased 24.75% in rupee terms and

11.38% in dollar terms. As payments for oil

imports are usually paid in Dollars and Euros,

the net effect of this increase is weakening of

rupee. This increase in oil import bill is being

observed since the time oil recovered its prices

after the dip in 2008-09. Moreover, this trend (of

increasing oil imports) is going to continue as

India’s consumption of oil is only increasing.

The effect of this depreciation of rupee has

been in terms of trade gap for manufactured

items increasing by about 9.3% (in rupee terms)

between 2011-12 and 2012-13. On the other

hand, manufacturing exports from India have

increased by only 7.91% in this period. The fact

that value (in rupee terms) of imports of

manufactured goods was 20.4% larger than

exports in 2011-12, makes the situation even

more worrisome

Let us take the case of China in detail. It’s

just 5 months in to the year and the trade

gap with the country has already touched

$12 billion in a total trade value of $26.5

billion. This is despite reduced gold imports

from China (details in Figure 2). This gap is

about 2/3rd of the India’s CAD for the first

quarter of 2012-13.

Now the question that follows from the above

facts is why is the trade gap widening

between the largest and third-largest

economies of Asia? The answer lies in the

composition of trade between the two

countries. More than half of China’s exports

to India comprise electronic goods (27%),

machinery (12%), organic chemicals (7%),

project goods (7%) and fertilizers (5%).

Clearly, China is providing India with two

broad classes of goods. Firstly, there are

goods, which are technology related. Since

India is a developing (more appropriately,

industrializing) country, the import of these

equipment is only going to increase as has

been happening in the past. Even economic

downturns have only retarded the growth

(6.9% increase by value in the import of

electronic goods and machinery) of these

imports and not reduce imports themselves.

Second, China is selling essential

commodities like organic chemicals and

fertilizers, which are indispensable no matter

what the market situation is. This is even

more reasonable given the burgeoning

middle class (leading to increased

consumption and hence, increased usage of

farm inputs) and growing population.

Now let us a take a look at the other side of

the table. Bulk of India’s exports to China

includes raw cotton (16%), non-ferrous

metals (15%), iron-ore (10%), cotton yarn

(9%), other ores and minerals (7%) and

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E COSHASTRA

AUGUST 2013

Is the Dragon’s fire incinerating the Elephant?

!!

! !

plastic products (6%). As is evident, India is

supplying goods, which have very low level of

sophistication. It is common knowledge that

the lower the level of sophistication of goods

the lower are the holdup costs for the buyer.

Therefore, source of such goods (India in this

case) is easily replaceable. The theory is

exemplified by the fact that Bangladesh is

fast eating into India’s pie of cotton exports

market. The sporadic supply of iron ore due

to the recent mining scams in Karnataka and

elsewhere have caused China to majorly cut

down imports from India.

In order to further comprehend the

vulnerability of India’s imports to China, it is

important to understand the past and likely

future trend of China’s sourcing from India.

These trends are found to be affected by

three major factors (which may be

interrelated); phase of economy, domestic

supply & demand of goods & services and

Chinese exports. Let us take a look at the

phase of Chinese economy. The country has

witnessed massive growth in the past three

decades. It is suspected to surpass US’s

GDP (in PPP terms) by 2016. Essentially, the

nation is in the latter half of its journey

towards being a developed country. History

tells us that a country in such a phase

witnesses declining growth rates and

correspondingly, declining needs of basic

resources.

The supply of various items of domestic

consumption (e.g. infrastructure build-up)

has outstripped its demand in China since

the period of recession. The growth of

China’s exports in the world market has seen

a declining trend (on an average) since the

time of recession. Given these factors, the

requirements of inputs for manufacturing

have seen either a decline or minuscule

growth.

The combined effect of declining growth

rates, over-supply of consumption goods and

declining trends in growth of exports has

been in terms of lower consumption of

India’s exports. The Chinese import of iron-

ore from India has declined by 62.82% (it

includes the effect of the ban on mining

activities in India). There is also a decline of

8.13% in cotton related imports.

One important thing to note here is that

although the above discussion is centered on

India’s trade with China, similar observations

are also aplenty in India’s trade with other

economies (e.g. European Union) as well.

This is the reason why the problem of trade

deficit is getting exacerbated instead of

getting compensated from India’s trade with

other nations as well. India’s export to the

world again comprises products of very low

levels of sophistication. Imports on the other

hand include petroleum, crude & products

!"#$%&'()'

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ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

!

Deficit is not just dependent on the current

trends as increased gold imports but also on

structural issues in the Indian economy.

Therefore, increasing the excise from 6% to

8% on gold (as done recently by the Finance

Ministry) is only likely to procrastinate the

advent of problem, not resolve it. India needs

to take lessons from the development of the

Asian Tigers during the last quarter of the

20th century. All these economies were

manufacturing based and started from low

tech products but eventually became world

suppliers of high-tech equipment. India

cannot afford to rely just on the services

industry to fill the trade gap as countries in

South East Asia are now challenging its

dominance in this industry. The government

needs to take a hard look at its

manufacturing policy to increase the

sophistication of the manufactured products

in order to be able to do both, meet the

domestic requirements and compete with

countries like China in the international

arena

About Author

Nitesh Sinha is a PGP II student at IIM. He

has completed his internship with Accenture

Management Consulting. Nitesh is an IIT

Guwahati (Electronics and Communication

Engineering) graduate of the 2010 batch. He

went on to work as a Software Developer

with a Bio-bioinformatics firm, Strand Life

Sciences Pvt Ltd. based out of Bangalore. He

had a 22 month stint with them. Nitesh

thoroughly enjoys taking part in cultural

activities and is a member of the theatrical

society of IIM A, IIMACTS. Event

Management, travelling and listening to

music are other things that interest him!

!

! !

(34.48%), gold (10.94%), electronic goods

(6.41%), machinery (5.63%), pearls and stones

(4.61%). Most of these goods are either

essential (e.g. petroleum) or related to

technology and the consumption of both

groups is likely to increase in a growing

economy. Table 2 shows the evolving trends in

export composition of China and India.

The inference from the above discussion and

Table 2 is that the problem of Current Account

&'

References

Trading Economics. (2013, July 13). INDIA CURRENT ACCOUNT. From Trading Economics: http://www.tradingeconomics.com/india/current-account

ASSOCHAM. India’s Gold Rush: Its Impact and Sustainability.

GOI. (2013). Commodity And Country Wise Imports In India From 2011-12 And 2012-13.

RBI. (2013). Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs. RBI.

RBI. (2012). India’s Foreign Trade: 2011-12. RBI.

PTI. (2013). India's trade deficit with China balloons to $12 billion. Beijing: Business Standard.

PTI. (2013, June 27). Current account deficit widens to record 4.8%.

WTO. (2012). International Trade Statistics 2012. WTO.

Moulds, J. (2012, November 9). China's economy to overtake US in next four years, says OECD. From Guardian: http://www.guardian.co.uk/business/2012/nov/09/china-overtake-us-four-years-oecd

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AUGUST 2013

CLOSE RANGE

Ashok Rimmanapudi IIM Banglore

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&"!

High Growth Trajectory: The FDI

and The Uncelebrated Savers

!

It has been only 2 weeks since the Ministry of

Finance has removed the FDI caps on many

critical sectors like Telecom, Insurance, stock

exchanges etc., based on recommendations

of Mayaram committee chaired by Sh. Arvind

Mayaram, Secretary, and Department of

Economic Affairs. Many more sweeping

changes are under consideration. Though

well intended, it cannot be helped but give an

impression that the ruling government is not

leaving any stone unturned to revive the

economy before the crucial election year.

Nine months earlier, when the much debated,

FDI Cap in retail has been relaxed, one

would have expected to see a flood of foreign

funds in this sector. But, on the contrary, not

a single application has been filed with the

FIPB (Foreign Investment Promotion Board)

as of March 2013.

These happenings seem to point at the

weakness inside the Indian economy, feeding

on lack of proper action, has been damaging

the economy further. Well, we will come to

that part later anyhow; first let us try to

understand the nature of FDI flows and their

impact on the economic growth.

Prior to 2006, the FDI flows to India have

never crossed 10 Billion USD. Starting

2006-07, the FDI flows to the country have

never gone below the 2006-07 level of 22.8

Billion USD.

Regarding FDI Inflows and their role in

economic development, researchers have

differentiated opinion about various aspects.

One of the most significant studies was

done by Borenszteina (1997) which resulted

in conclusion that FDI flows will have

positive impact on host economy only under

certain condition. Carcovick (2005) proved

FDI flows are not necessarily

the flag bearers of Economic

development but rather a

lagging indicator of the same.!

ECOLIBRIA

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THE ECONOMICS CELL NMiMS, MUMBAI

Exhibit 1: FDI Inflows and real GDP Growth !

! !

&&!

through econometric analysis, which is robust

to national income, financial development and

openness to trade, that FDI inflows do not

have a causal relationship with economic

development. Observing Exhibit 1, we can

see that it was only after the propulsion of

Indian economy into high growth trajectory

(Real GDP growth>8%), that the FDI flows

shifted from the muted levels (<10 Billion

USD). So in a way, this suggests that the

FDI flows are not necessarily the flag

bearers of Economic development but

rather a lagging indicator of the same.

Hence this brings the issue of causality in

economic development - Foreign inflows

relationship to the front. The actions by the

ministry of Finance seem to suggest the belief

and attribution of foreign flows as the causal

factor between the two. Putting it in another

way, it seems as though the Government

is turning to the foreign investors to

revive the economy. So the next part of the

article deals with the role of domestic

investors in the economic development so

far.

India, like its Asian counterparts, is a saving

rich nation. The savings rate of domestic

households and private corporates has been

very high in India compared to developed

economies, but a crucial difference in

Indian economy is that, unlike its Asian

Counterparts, it is consumption driven. As

Gross domestic savings (GDS) in one year

become the source of investments for next

year, the investment rate also follows a

similar pattern. Exhibit 2 shows the

investment rate pattern since 2000 and

Exhibit 3 shows the year-on year growth rate

of Investments since 2001.

Source: Handbook of Statistics on Indian Economy 2011

Exhibit 2: Investment Pattern of different

sectors in India since 2000-01

Exhibit 3:

Year-on-Year Growth rate of

Investments of different sectors

in India since 2000-01

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E COSHASTRA

AUGUST 2013

Exhibit 4: Sector-wise ICOR

High Growth Trajectory: The FDI & The Uncelebrated Saver

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! !

Two observations can be made from the

exhibits 4 and 5. Firstly, the foreign direct

investments have always been minor

compared to investments from households

and private corporates. Secondly, there is a

pattern of slowdown in growth of investments

from private corporate and foreign sector

since the world economic crisis of 2008.

So, given that the slowdown in economic

growth is due to slowdown in investments by

corporate and households, the situation

clearly calls for application of Keynesian

principles. But given the figures of high fiscal

deficit (4.9 % in 2012-13), the GOI is not in a

position comfortable enough to go on

spending spree to propel the economy. This is

why the quality of spending has attained its

vitality which inevitably leads to conclusion

that the spending should be aimed at

increasing the productive capacity.

At the outset of the 12th 5-year plan, the

Planning Commission has calculated the

required investment in different sectors and

estimated productive capacity improvement

thereof. This figure, technically called as

Incremental Capital Output Ratio (ICOR), is an

indicator of the productiveness of an

investment in a sector.

Exhibit 4 provides the following insights

1. Investments in Electricity & Gas have

most significant effect on improvement in

productivity, followed by investments is

Mining and Manufacturing

2. The National ICOR is 4.04

Exhibit 5: Potential GDP growth rate in 2013-14

So, putting all of the above factors together,

1. FDI does not necessarily accelerate

economic growth. It is more of a lagging

indicator of development.

2. Indian Economy has high saving rate like

other Asian economies, Average Gross

Domestic Saving (as % of GDP) since 2000-

01 is 31%

3. Indian economy is different from other

Asian economies as it is consumption driven.

So, this makes the job of reviving economy

easier the current slowdown can attributed to

anaemic demand.

4. So, the solution lies within. The domestic

saving by themselves can lend to a growth of

8.6 % next year (ref. exhibit 5). Rather than

trying to restore the economic growth

through foreign investments, the focus

should be on attracting the domestic

savers (households & Private Corporates)

and making qualitative utilization of Public

sector spending.

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THE ECONOMICS CELL NMiMS, MUMBAI

2. As employees are major source of

household savings, attractive schemes,

alternative to the existing funds like Provident

Fund etc., should be developed.

Simultaneously, new instruments like Capital

Indexed Bonds (CIB) aimed at diverting

saving from unproductive assets like gold

should be aggressively promoted.

3. In order to encourage private participation

in infrastructure projects with long gestation

period, encouraging exit mechanisms should

be developed as this leads to the safety of

investment.

References

- Borenszteina E, J. De Gregoriob, J-W Leec, (1997),

“How does foreign direct investment affect economic

growth?”, Journal of International Economics

- Planning Commission of India, (2011), Report of the

committee on Investment requirements, Twelfth Five

Year Plan Committee

- Reserve Bank of India, (2011), Handbook of

Statistics on Indian Economy

- Carkovic. M and Levine R, (2003), “Does Foreign

Direct Investment accelerate Growth” , University of

Minnesota, Working Papers

About Author

Ashok Kunar Rimmanapudi graduated with

B.Tech in Electronics & Communication

Engineering from IIT Guwahati in 2012. He is

an ardent lover of Macroeconomics by choice

and a movie buff by helpessness. When hassle

free he loves spending time doing anything

from working out his grey cells to sharpening

his backhand. He is currently in his 2nd

year of

PGP at IIM Banglore.

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The significance of high productive

infrastructure investments is that it will have a

two pronged effect on the economy. First, it

will remove the supply bottlenecks in the

economy. Secondly, these investments

increase the domestic demand because of the

ripple effect of the spending.

This article concludes with the following

recommendations for reorienting into the high

growth trajectory:

1. The Cabinet Committee on Investments

(CCI), should make promoting investments in

Electricity & Gas, Mining and Manufacturing

its top priority.

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E COSHASTRA

AUGUST 2013

OPINION

Mohit Bajpai

NMIMS, Mumbai

Saurabh Sharma

NMIMS, Mumbai

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The Food Security Bill : Vote bank Politics or

A Game Changer ?

A Populist Step

An initiative like Food Security Bill in its true

spirit is a great step to help the nation get rid

of a chronic disorder like malnutrition. But the

way it has been drafted and intends to

perform poses serious questions on its real

motive. Thus it seems to be more populist

step directed at vote bank for upcoming

elections rather than treating the problem of

malnutrition.

Past Experience

With the agenda of alleviating the basic

problems of the weaker section of the society,

the government has time and again come up

with measures to help them. One such

attempt is the “Mid-Day Meal” (MDM). It was

started in the year 1995. Its main objective

was globalization of primary education, and to

impact the nutrition intake of the students. But

even after spending exorbitant amount of

money (For example, a budget of Rs. 7324

Crores was allocated to this project in the

year 2007-08), there are about 67.5 percent

of children under 5 years and 69 percent of

adolescent girls who suffer from anaemia due

to iron and folic acid deficiency. A nationwide

study by Planning Commission also shows the

MDM scheme to be found wanting on several

evaluation parameters.

Some of the factors on which this scheme was

reviewed were nutrition level, quality of food

and food safety. Planning Commission has

recently brought out an evaluation report of

the national MDM scheme. Some of the

findings are reproduced below (verbatim):

• Except for Tamil Nadu and Kerala, in rest

of the states a majority of sample schools,

on an average, suffer from the

unavailability and poor functional condition

of kitchen sheds.

• All the states, except for Bihar and

Rajasthan, have reported poor availability

of tumblers. Except for Rajasthan, all the

states have reported a poor availability of

plates.

• Out of the 17 sample states where the data

was collected, students in 9 states reported

that they were involved in washing utensils.

India is 15th most malnourished country with

its Global Hunger Index (GHI) increased from

1996 to 2011. 25% of all hungry people

worldwide live in India and 40% of children

below 5 years of age are undernourished.

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Recommended Dietary Allowances as per Indian Council of Medical Research (ICMR) is

as below:

A separate agency evaluated efficacy of the food in schools run in Ahmadabad

and came up with the following results

So the core proposition of the policy that is to

provide nutrition is not met, and because of

negligence in issues like quality and food

safety, 22 children recently lost their lives.

Food security or nutrition security?

India is 15th most malnourished country with its

Global Hunger Index (GHI) increased from

1996 to 2011. 25% of all hungry people

worldwide live in India and 40% of children

below 5 years of age are undernourished.

Share of expenditure of cereals has decreased

to 29.1% in rural areas and 22.4% in urban

areas in 2009-10. The bill doesn’t talk about

nutritional security but only supply of food

grains. But just by making food grains easily

available at cheaper prices won’t actually

decrease the overall cost of nutrition. It will

also add more pressure on the demand side

and may push the agriculture sector to

produce food grains more.

Besides that there have been schemes in

place which provide cheaper food grains to

citizens, but it has been observed that

despite that the level of malnutrition has not

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E COSHASTRA

AUGUST 2013

which was enacted in 1997-98 to mitigate the

practical difficulties in centralized

procurement.

The bill relies on existing TPDS and

procurement system which are already

notorious for inefficiencies and leakages

amounting to as high as 40%. This poses a

serious challenge to the effectiveness of the

scheme.

Provision of cheap food grain to about 70% of

the country’s population also throws up

serious issues for the agriculture sector. The

government already buys about 1/3rd of the

grain output. In case of increased demand,

the agriculture sector may shift to low value

cereal cultivation. It will also create a crowding

out effect on the private players competing for

the remaining stock. It will have an upward

rising impact on the inflation. Thus there will

also be an upward shift in the Minimum

support prices (MSP) because government

would become a larger buyer of the food

grains. Another impact would be on other food

items, like vegetables, pulses.

It is argued that despite similar schemes of

grain distribution by central and state

governments the nutrition level of children has

actually decreased. It can be attributed to

other factors like drinking water, hygiene and

protein rich food.

The government estimates the cost of

implementing bill to be Rs. 1.3 crores per

annum. But to provide a complete food and

nutritional security to underprivileged and

mothers and children the financial burden on

the exchequer would be much higher (~2.4

crores). It will involve additional financial

obligations of provision of clean drinking

water, hygienic sanitation facilities and protein

rich food like pulses, fish etc. But the current

The Food Security Bill: Vote Bank Politics or A Game

Changer

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dropped significantly. It points to our argument

that a cereal centric approach won’t be

sufficient to address the problem of

malnutrition.

Where is the security? - Clause 51

Without enhancing the production capacity,

irrigation systems and storage facilities, the

government has simply rushed through the

passage of the bill. The bill carries an

objectionable clause which absolves Central

as well as state government of any obligation

in case of supply failure due to war, flood,

droughts, cyclone and any other act of nature.

Agriculture is highly dependent on monsoons

(~60%) in India; impact on farm produce is

quite frequent due to climatic conditions. So

under adverse conditions the security of food

becomes a big question mark.

Vote bank politics

During the last tenure of UPA I, a lot of

populist measures had been taken by the

government to create a favorable environment

and appease the voters. Farm loan waivers,

MNREGS and implementation of 6th pay

commission. UPA II already facing flak from

urban middle class over graft issues seems to

be planning to leverage upon Food Security

Bill to win votes.

Structural flaws

The bill proposes a centralized procurement

and distribution mechanism which takes away

a state’s legal authority to customize it

according to a state’s needs and strengths.

Some states like Tamil Nadu have their own

PDS which now will have to comply with

National Food Security Bill. It also mandates

the central government to procure for the

central reserve of grains, which is in discord

with the Decentralized Procurement System

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Bad economics

India is reeling under tremendous pressure of

widening fiscal deficit and reducing value of

rupee. It is expected that it will increase to

about $155-160 billion this year way above

last year figure of $104 billion. High spending

on subsidies and lower than expected

revenue collection puts an inflationary

pressure also on the economy. Given such a

scenario import of food grains to meet the

additional requirements over local sourcing

will burden the economy further increasing

the fiscal deficit.

So it can be concluded that Food Security is

imperative for the country facing an acute

problem of malnutrition and hunger. But for

such a large and populous country a well

articulated and more practical route than

Food Security Bill is required. The Food

Security Bill’s hasty passage raises serious

questions about meeting its actual goals and

makes it seem more of a political gimmick.

About Mohit Bajpai

He is an engineer with 2.5 years of work ex

in Software Industry. He loves playing and

watching badminton. Also a keen follower of

Tennis and Cricket. A great fan of movies

and series like 'Suits', 'Game of Thrones'.

Likes to read business news and articles

About Saurabh Sharma

He is an engineer with 2.5 years of work ex

in Software Industry. He loves playing and

watching cricket. Heis a movie buff and

great Batman the Dark Knight fan. Follows

business news and current events around

the world

"*!

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bill does not include the above provisions

which render it ineffective.

Black Marketing

Though launched with the best intentions,

there is a strong possibility of beneficiaries

selling it in the secondary market. In order to

understand this, lets understand it through

need hierarchy, so if a household gets grains

at subsidized rates, there is a possibility that

due to budget constraints he might sell it in the

secondary market, in exchange of other

goods. Let’s evaluate it through indifference

curve.

Now when the government gives the food, it

expects that there is a shift upwards, but

because of the selling in the secondary

market, there is no such shift. On the contrary

the government has to spend money to stop

hoarding. To top that, there is no guarantee

that the quality of food will not be

compromised.

References:

1)An Evaluation of Mid-day meal by Sweta

Mahandiratta, K.V. Ramani, and Dileep

Mavalankar

2)Food Security Bill: Good politics to deliver bad

economics accessed from

http://www.deccanherald.com/content/213752/food

-security-bill-good-politics.html

3)2012 Global Hunger Index report

4)National Food Security Bill-Challenges and

Options, A Gulati, J Gujral, T Nandakumar

5) Report of the expert committee on national food

security bill accessed from

http://eac.gov.in/reports/rep_NFSB.pdf

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AUGUST 2013

Subscript: Left to right

1. The exclusive possession or control of

the supply, an American-

originated board game Monopoly (8)

2. Goods are those which cannot be

provided to one group of consumers,

without being provided to any other

consumers who desire them Public (6)

3. Tax imposed to stimulate more

domestic production of the product in

question Tariff (6)

4. Association of independent firms for the

purpose of exerting some form of

restrictive influence on the production or

sale of a product cartel (6)

5. Green Gold : The empire of ___ tea (3)

6. A statistical measure of inequality.

Score of 0 implies perfect equality and

score of 1 implies perfect Inequality,

known as ____ coefficient Gini (4)

7. The father of economics Adam smith

(4,5)

8. Someone who benefits from resources,

goods, or services without paying for the

cost of the benefit free rider (4,5)

9. A form of trade in which one good or

service is exchanged directly for another

barter (6)

Superscript: top to down

1. The economic doctrine that government control

of foreign trade is of paramount importance for

ensuring the military security of the country.

Mercantilism (12)

2. Value of the best alternative foregone

opportunity cost (11,4)

3. ____ is present when future events occur with

measurable probability Risk (4)

4. Synonym for prize, bonu, reward, bounty

premium (7)

5. The term first used by Keynes for consumer

confidence animal spirits (6,7)

6. Planning commission is an _______ body

advisory (8)

7. Middle name of the author of the book The

General Theory of Employment, Interest and

Money maynard (7)

8. Recently, 100% FDI has been approved for this

industrial sector telecom (7)

9. An environmental tax which is imposed on

products which utilize materials which contribute

to greenhouse gas pollution known as _____ tax

carbon (6)

10. When a government/ business spends more in a

given period of time than they generate in

income, they incur a _____ deficit (7)

11. One of the proposals of the _____Woods

conference was that currencies should be

convertible for trade and other current account

transactions Bretton (7)

12. A very early school of which likened the

interactions between different sectors and

classes of the economy, and the monetary flows

between them, to the circulation of blood through

the human body physiocrat (10)

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AMAZING FACTS

$%#

Before 1896 India was the only diamonds

producing country in the world.

Captcha is actually an acronym. It means

"completely automated public Turing test to tell

computers and humans apart

Saudi Aramco is an oil company that makes

over $1 billion of revenues in the course

of just one day! A million dollars

weighs about one metric ton - Hence

the phrase, "a ton of money”.

Last year, for the first time, spending by Apple and Google on

patent lawsuits and unusually big-dollar patent purchases exceeded

spending on research and development of new products,"

writes The New York Times

Dell has spent more money on share repurchases than it earned throughout its life as a public company, writes Floyd Norris of

The New York Times

Apple's cash and investments are now equal to the GDP of Hungary and

more than those of Vietnam and Iraq.

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The budget was first introduced in India on 7th April 1860 from East-India Company to British Crown. The first Indian Budget was presented by James Wilson on February 18, 1869. Mr Wilson was the Finance

Member of the India Council that advised the Indian Viceroy. He was Scottish businessman, economist and Liberal politician. He founded The Economist and the

Standard Chartered Bank

Budget of 1973-74 is known for ‘Black Budget’ in India. During this year budget deficit in 1973-74 was

Rs 550 crore

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AUGUST 2013

$&#

In the first quarter of 2012, the number of iPhones Apple sold per day surpassed

the number of babies born per day worldwide (402,000 vs. 300,000), according

to Mobile First.

Renaissance Technologies, a hedge fund run by James Simons, has allegedly

produced average returns of 80% a year since 1988 (before fees), according to

Bloomberg. That would turn $1,000 into $2.4 billion in 25 years.

The first FM's post went to Sir RK Shanmukham Chetty, industrialist, erstwhile Diwan of Cochin state and

Constitutional Adviser to the Chamber of Princes. He had been a member of the pro-British Justice Party. Mr. Chetty presented the first budget of Independent

India on November 26, 1947, in the backdrop of partition and riots.

42% of the world's poor live in India

Half the world’s outsourced IT services

come from India, amounting to a $47

billion dollar industry

India is the world's second largest importer of arms and has spent $50 billion on defense purchases in the

last decade

India used to account for 33% of the world's GDP

before Industrial Revolution; then fell to

3%; now may rise to 25%

China's economy grew 7 times as fast as America's over the past decade (316%

growth vs. 43%)

When you buy Chinese stocks, you are basically financing the Chinese

government. Eight of Shanghai's top ten stocks are government owned.

The employees printing the Budget papers in India are kept in complete isolation

(quarantine) in the Finance Ministry for one week before the Budget.

Transfer Pricing Regulations was introduced by Yashwant Sinha in Budget

2001-02.This regulation played a big role in the prevention of erosion of the tax base

in India.

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