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The Real Kisan Crisis

Even as the Indian Meteorological Department on Wednesday forecast ‘below normal’ rainfall for the Juneto-September monsoon season and a farmer from Rajasthan committed suicide at an AAP rally in Delhi on the same day, there has been plenty of sound and fury about ‘saving’ farmers over the last few days. On Monday, aday after he spoke at the Ramlila Maidan about the government being ‘anti-farmer’, Congress vice president Rahul Gandhi lambasted a ‘suitboot ki sarkar’ that didn’t care about India’s peasantry in Parliament. Other than the politics, his plan to ‘rescue’ farmers signifies nothing.

farmer-afp

Political maneuvering has kept everyone’s eyes focused on the Land Bill and its potential to forcibly dislocate farmers from their property. But no party has addressed the enormous challenge of how to stop farmers from fleeing their profession in droves or from committing suicide.

Like the rest of us, rural families seek sufficient income for a good quality of life. When that income is missing from farming, they find new occupations. The real concern facing India’s 56 million farmers living in its six lakh villages is that we have still not devised an efficient way to cope with the systemic risks that threaten farmer incomes.

Farm incomes are affected by weather, which impacts production. And prices, which impact sales. The marketing year 2014-15 was agriculture’s annus horribilis with a rare double whammy of bad weather and low prices. The consequent rural anger and helplessness is spilling out on city streets through participation in rallies and protests.

Freak weather since January has affected wheat, chana, lentil, maize, cotton, rapeseed, mustard and fruit crops. Even though farmers received weather alerts through text messages and community radio from government agencies, they could do little as the crops were not ready for harvest.

Crop insurance is the solution. But according to an Assocham study, 80 per cent farmers are unaware of it. Insurance companies, too, focus on farmers willing to pay a premium, or those who opt for loans with mandatory crop insurance. Even those who bought weather insurance won’t find succour this year. The insurance is done on an area basis. So, if heavy rain damages only a few acres in a village, the insurance company pays compensation for the average loss of the village instead of the individual farmer’s loss.

The government-owned Agriculture Insurance Corporation estimates that claims from unseasonal rains could touch Rs 100 crore. Compare that with American farmers, who so far have received $8.8 billion in indemnity payments for their 2014 crops. This is a 26 per cent decrease from 2013, when farmers received more than $12 billion in indemnity payments. The US federal crop insurance programme covers corn, wheat and soya bean, as well as fruits and vegetables.

Meanwhile, efforts such as the central government’s direct relief payment, relaxation in the Food Corporation of India’s (FCI) procurement specifications, or Haryana’s proposal to set up its own insurance company appear too little too late. The unseasonal rains came as a final blow after two seasons— kharif and rabi 2014—of prices dropping below cost of cultivation. From producing too little in 2012-13, we seem to have jumped to producing too much. How did that happen?

Over the last one year, farmers were mainly catering to domestic demand, which isn’t enough to absorb the entire supply. And that is the nub of the matter. India is crucially dependent on exports to keep its agriculture profitable.

In 2014, the additional outlet of export was cut off mainly because bumper crops in competing nations and the stronger dollar pushed down prices of corn, cotton, dairy, tea, oilmeals, guargum, basmati, sugar in the world markets. Import of cheaper edible oils kept a lid on domestic oilseed prices. In short, our crops couldn’t compete.

Stocks of cotton and corn procured by the government to shore up prices acted as an overhang on the market. The Rs 500 crore Price Stabilisation Fund remains for potato and onion. Since consumers and the wholesale price index (WPI) were benefitting from falling prices, public action remained subdued. Sensing the seething rural anger, political parties cashed in. For farmers, protests against the Land Bill were proxy for the deeper trauma of falling incomes.

After continuously rising for last five years, India’s farm sector and allied product exports have declined in 2014-15. And this vital but little known fact reveals the real reason behind the widespread rural distress. Farmers urgently need an efficient system to cope with the vagaries of global trade.

The real question before every political party is how can we make Indian agriculture globally competitive? The answers to that can’t be found in the Ramlila Maidan and Bhatta-Parsaul.

DISCLAIMER : Views expressed above are the author’s own.

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The Suicide In The Capital Must Wake Us To The Extent Of Farm Distress

India Farmer Protest

The suicide of a farmer at the AAP rally today in the heart of Delhi is a stark symbol of rural anger and helplessness. It is an equally grim reminder that political parties have no solution to offer other than a relentless barrage of sound bites and photo opportunities at the hospital. Urban India’s interest in agriculture begins and ends with the annual monsoon forecast and the weekly inflation number. In 2014-15, the monsoon was normal and inflation was subdued. In other words, there was no impending rise in food prices. So all eyes were off the ball. “Only 20% farmers in India have crop insurance. “ India’s 118 million farmers experienced 2014-15 differently. They were saddled with more production than the market could absorb–due to the overhang of last year’s stocks and dull exports, and high fixed costs. And they lack the financial resilience to cope with this situation. Indian agriculture is financed by debt. If farmers don’t at least break even in a year, they can’t pay back banks, village moneylenders, commission agents, and agri-input dealers. School fees, motorcycle loan, tractor loan and other recurring costs become a noose. This year, there was hardly any money on the table throughout the food value chain because of the depressed prices. Sugarcane, traditionally the most profitable crop, is the classic example. Production has surpassed demand so comprehensively that prevailing wholesale prices are at round Rs22/kg while the cost of production of sugar (by crushing the cane in a mill) is Rs30. As a result, farmers have arrears of over Rs19,000 crore for sugarcane in 18 states, of which almost Rs10,000 crore is owed to farmers in Uttar Pradesh alone. There is little hope of succor any time soon as half of the 530 mills that were crushing cane this season have closed down to stem further losses. Since the average Indian farmer, with around one hectare of land, lacks the wherewithal to similarly hunker down, the human suffering is significantly larger than the financial suffering.Farmers Protest Aganist Land Bill At Jantar MantarWhat Can Be Done To Help

Is there a way to ensure farmers acquire the financial strength to withstand a bad season or two? The answer does not lie in giving more crop loans or announcing loan waivers. Instead, farmers can be made more competitive by helping them reduce the cost of cultivation.

Efforts to improve soil health can reduce the excessive spend on fertilizers and chemicals. Certified seed can ensure that no money is lost buying fakes trolling the market. There will be no need for expensive diesel gensets for tubewells if drip irrigation and better water management is promoted. Livestock and poultry act as a natural insurance against crop failure. But returns remain below par because high-yielding cross-bred animals are expensive.

VIETNAM-ECONOMY-RICE

Small farmers save on labour and machinery costs by toiling themselves. The downside is the severe stress on health and wellness of the primary bread earner. The virtual absence of personal insurance and crop insurance makes it tough to recover from even a temporary setback because that requires ready cash in hand. Only 20% farmers in India have crop insurance. Substantially increasing this number will raise agriculture’s overall risk-bearing capability.

Post-harvest crop management and marketing are a serious addition to costs. From poor transportation systems and cartelization of middle men to the lack of modern warehousing and storage capacity, all inefficiencies in the system add to the farmer’s cost of business.

The mobile phone alone can be of enormous help. A survey of farmers in Bihar, Punjab, Haryana, Uttar Pradesh, and West Bengal in 2011 found that more than 70% of the farmers polled said they were getting better prices because they were using the mobile phone for agricultural information.

Lower cost of production will allow farmers to compete more strongly against China, Ukraine and Brazil in world commodity markets. This will take care of the problem of plenty that is often faced when India is outbid by these fierce competitors overseas.

Most importantly, farmers have to build assets other than land. Gold remains the popular choice. But it is out of the reach of families without disposable income. If the crop itself becomes an asset in the hands of farmers through negotiable warehouse receipts, they will be freed from the vicious cycle of land mortages and foreclosures.

“How prepared is the Indian farmer to handle the impact of climate change on his economic life?”

Solutions to all these problems are available. The thrust to a national agri market, soil health cards, and Jan Dhan accounts by the Modi government is a good step. But the rest need an equally massive push because farmers themselves are too caught up in the relentless cycle of making two ends meet.

The protests on the streets of Delhi are ultimately about the resilience of Indian agriculture to impending climate change. The freak weather incidents will become more frequent and years of normal monsoon rarer still. Traditional crop insurance will blow a fuse. How prepared is the Indian farmer to handle the impact of climate change on his economic life? That is the question. If our political parties are wise, they will spend some time pondering the issue.


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Why Government Should Not See Gold As A Burden

India is burdened by its love for gold. Our position as the one of world’s top gold consumers has become a cross round our neck. But need it be so? Not if China’s success is any indicator. China has single-handedly tilted the balance of power in world gold market from West to East.

China is the most important player in the world gold market. It accumulates gold for its monetary value and in anticipation of a new monetary system. In 2013, China emerged as the world’s largest producer and consumer of gold. In 2014, it effectively sealed this dominance with a unique mix of market-savvy strategies.

The first one was to encourage its people to start holding gold. In 1950, communist China prohibited private ownership of bullion and put the gold industry under state control. Fifty years later the People’s Bank of China abandoned its monopoly on the purchase, allocation and pricing of gold. In 2004, for the first time since 1950, private persons were permitted to own and trade gold.

gold-bullion-vault

Gold demand in China could not have flourished as it has without the blessing of the authorities. The World Gold Council’s recent report, China Gold Market: Progress and Prospects, says, “China’s leaders regard the public’s gold holdings as part of the nation’s reserves that could be called upon in an emergency”.

China should accumulate 8,500 tonnes in official gold reserves, more than the US, according to Song Xin, President of the China Gold Association, General Manager of the China National Gold Group Corporation and Party Secretary. Investment in gold has benefited also from the limited selection of alternative forms of savings in China. Today China is the world’s largest market for gold bars.

This demand will only accelerate in future. And it will be a fundamental factor supporting the flow of gold from West to East.

The second aspect of the strategy is to consolidate its pole position as largest producer of gold in the world. Gold’s big three (South Africa, the United States, and Australia) were the big three for a long time. In 2007, China overtook them. Gold production over the last decade has more than doubled. Interestingly, the major source of China’s big increase in production is thousands of new smaller-scale mines. With labour and materials cheap, coupled with a generally lax regulatory system, it’s not too difficult to develop a mining operation.

Foreign expansion will be a growing priority for Chinese mining companies. Australia, Peru, Canada, Colombia and the United States are all attractive destinations for investment. Growing political ties between China and Africa will also spur the development of projects in Ghana and Congo. China’s central bank recently circulated a draft plan to ease restrictions on gold imports by local miners.

The third strategy is the internationalization of its gold market. Until recently, China’s gold market was closed. Now Chinese regulators are pushing to open up the country’s gold trade and lure foreign investors as part of its broader effort to link the mainland to global markets.

In September, it began offering international institutions access to yuan-denominated gold contracts in Shanghai’s free-trade zone through the International Board of SGE. The core business of the SGEI is to facilitate offshore gold trading in RMB. International customers can only deposit and withdrawal gold into and from IB Certified Vaults. This way international banks or investors trading IB physical products cannot drain physical gold from China mainland.

The first transactions were put through by a diverse group comprising HSBC, MKS (Switzerland), and the Chinese banks, ICBC, Bank of China and Bank of Communications. MKS is the Geneva headquartered precious metals trading group that also owns the large PAMP refinery in Switzerland. International bullion banks who have already announced their participation include ANZ, Standard Chartered and HSBC.

The presence of international refineries within SGEI trading should help it become a serious competitor to the gold price discovery in the London and New York markets. Since there is a lot of physical gold flowing through the exchange, price discovery is not just based on mostly unallocated gold as in London or paper gold as in New York.

There is also a larger game plan here. The world price of gold is dollar-priced and fluctuates with the US dollar. With the shaky status of the US dollar as the international reserve currency, China wants a new global currency setup. China has established a free trade yuan-denominated spot gold trading platform and a corresponding settlement system to increase China’s influence over global bullion prices.

The fourth, and related, development has been the closer relationship between Hong Kong, Singapore, and Shanghai gold markets. The Hong Kong-based Chinese Gold and Silver Society recently announced that they plan to build a massive new precious metals vault in Qianhai in Shenzhen. Its real purpose is to support a CGSE gold trading platform in Shenzhen and allow this new Shenzhen gold exchange to link up with the Shanghai Gold Exchange. Singapore has also introduced a physical gold contract this year in tandem with SGE, highlighting a push in the biggest consuming region to establish new price benchmarks as demand shifts east.

In the past, the world’s gold supply was channeled through London. Now a majority of refiners are in Switzerland and they are increasingly producing the 1 kg bar destined for Asia. With China opening up gold importing to bullion banks to channel gold directly to Shanghai, the supply through London is falling. So the ability of London to reflect a price that accounts for the bulk of global demand/supply is diminishing. Soon global gold suppliers and buyers will flock to do business in Shanghai rather than in London. In short, China is purposefully changing the structure of the world gold market.

China’s moves show that some governments believe gold will return to its role as an international currency. That gold can fill the vacuum created by the flailing ruble, dollar and the euro. India, as the other engine of the demand pull from the East, can equally easily take advantage of this shift. But that will only happen when we stop seeing gold as a burden, or as merely raw material for the jewellery sector, and fit it into our broader strategic and financial imperatives.