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Gold monetisation scheme: It’s not shiny enough

The big plus of the proposed Gold Monetisation Scheme (GMS) is that it thinks of the consumer. It makes it possible for her to use small pieces of gold for generating income or accumulating more gold. Life will also become easier for the jewellery industry that gives two million jobs.

But is it ready to use? Not so fast. And will it fetch India its rightful seat on the table with the big boys of the global financial market? Not so likely.


The GMS requires three pillars to be successful. One, India should have a clutch of refineries that meet credible process and corporate governance standards. There are 17 refineries in the country. But we lack a certification standard for refineries against which they can be assessed by banks wanting to hire them.

Only one Indian refinery has been approved by the London Bullion Market Association, whose standard is globally accepted. Until Indian standards are set, banks won’t move. Refiners run on wafer-thin margins anyway. They won’t be keen to participate without a hefty processing fee.

Second, the scheme needs a buy-in from the banks. They will not accept certificates based on gold assayed by a Bureau of Indian Standards-approved outlet without adequate checks and balances. They will also need clear-cut rules on who is liable in any dispute about quantity and quality of gold left by the consumer with the testing centre. The scheme allows banks to trade on commodity exchanges. The big question is, will the RBI agree?

Third, for the consumer, the scheme will operate exactly like a fixed deposit, with tax-free interest. If the rate of interest is meagre, they are unlikely to go laughing all the way to the bank. A gold deposit plan run by the State Bank of India since 1999 managed to draw just 15 tonnes because of a requirement to deposit a minimum 500 g and low interest rates of 0.75-1 per cent.

Rural consumers are going to be left out until the scheme expands geographically. More importantly, there is no guidance on how the taxman will treat large deposits of under-the-mattress gold. Since no amnesty scheme has been announced, people may take the view that only the paranoid survive and stay away.

Once the scheme takes off, the gains to the economy can be impressive. India can reduce its dependency on imported gold. The abundant physical supply will remove the artificial premium due to scarcity charged from consumers. A national gold bullion standard and certification process will develop that can match global benchmarks.

Jewellers will be able to reduce leverage and debt. Jewellery exports will rise due to greater availability of raw material. Banks will be able to free up cash by depositing gold as part of their reserves with the RBI. The RBI can shore up its bullion reserves by purchasing recycled gold. Customers can rationally evaluate the returns from gold versus other asset classes.

There will be an official national market for gold coins and bars, including the official Ashok Chakra coin and those issued by certified refiners, which will be traded as paper on commodity exchanges. In short, the policy has the potential to infuse transparency and energy into a troubled and fragmented sector.

And yet, we expected more. India is the world’s largest importer of gold. Our festival demand and rural demand moves the international price. But we have never leveraged this pole position to our advantage. What we need is the larger vision of how the government plans to tilt the axis of power from the West to the East in the international gold market.

As always, China is leading the way. Chinese regulators have pushed open up the country’s gold trade to foreign investors to make the yuan more international. Last September, it established a yuan-denominated spot gold trading platform and a corresponding settlement system in Shanghai’s freetrade zone to increase China’s influence over worldwide bullion prices.

The presence of international refineries, bullion banks and trading houses has made it a serious competitor to the duopoly of the London Fix and the New York gold futures market. There is certain to be Chinese fixing price before the end of the year and rapid development of a Chinese gold options market.

India too needs a plan to use gold as political chips on the world’s financial poker table. Without it, we will remain outside with our nose pressed against the glass, watching the big boys play. The proposed GMS will just help to keep our noses clean.

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

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Schizophrenia in soyabean

RL Stevenson said “man is not truly one, but two”. He could as well be speaking of the soyabean. The soyabean is Nature’s way of packaging a handy mix of fat and protein. Unfortunately, in India, their fortunes rarely go hand in hand. And this has left soyabean with a Dr-Jekyll-and-Mr-Hyde type of personality.

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David Ricardo and the curious case of soyabean

If the secret of business is to know something that no one else knows, India’s soya barons are in an unenviable spot. In the last few years, their own business has become hard to figure. Factories are lying idle but beans are expensive. There are no takers for their soya oil. Yet, it is being imported. Once states were vying for their investment. Now they are hobbled with taxes. Suspecting deliberate sabotage, the jittery industry is crying foul. But as always, the real enemy is elsewhere.

David Ricardo developed the theory of comparative advantage in his book “On the Principles of Political Economy and Taxation”, written in 1817. The core idea is that each country should focus on what it is best at, or least bad at, producing. Comparative advantage is the impetus for global trade. It is the reason why global manufacturing shifted to China and Bangalore became an IT hub.

Comparative advantage is good news for consumers. For managers, it means greater competition from across the globe. More and more jobs and industries have become tradable. And in commodities – the ultimate tradable industry – the disruption is even higher.


India’s soyabean industry is a textbook case for students of Ricardo. India is a conducive market for both soyabean oil and its meal, which is fed to cattle.

Demand for oil and feed is rising by over 6% annually. Health-conscious consumers are buying soya protein, and soya-fortified wheat flours and biscuits as a substitute for animal protein. But the gains are captured by foreign suppliers – Brazil and USA for soya oil, and Malaysia and Indonesia for palm oil.

Palm oil is the world’s cheapest oil because oil palm trees are high-yielding perennials, unlike beans harvested annually. This makes it the first choice of price-sensitive Indian consumers. Palm oil is also easiest to blend, and has widest usage in the food industry (margarine, biscuits, breads, breakfast cereals, instant noodles, chocolate, and ice cream) and non-food (shampoo, cosmetics, candles, and detergents) sectors. The price of palm oil thus keeps all other oils honest. In a direct fight, Indian soya oil is easily outgunned.

Within the soya oil race, Brazil, Argentina and USA are clear winners, thanks to advanced GM seed technology, which gives them up to 60% more yield per acre.

Indian yields have remained static for decades because farmers continue to grow it in under-nourished and dry areas, with minimum inputs.

Indian processing is equally outclassed. On average, India’s solvent extraction plants are about one-sixth the size of those in the United States and the EU and use significantly more power, steam, and hexane solvent per unit of oilseeds processed. Even India’s largest integrated expeller-solvent extraction plants are small and high-cost by international standards.

To understand why Indian soyabean is caught in this poor productivity trap from farm-gate to factory-gate, which cost them the race, we need to rewind the past.

Soyabean contains 18% oil and 82% protein. India rightly introduced soyabean in the Seventies not as an oilseed but as a pulse (dhal) to fulfill demand for proteins. Uttar Pradesh farmers were encouraged to adopt soyabean as a low-input crop for fallow areas. Soyabean was seen as a miracle crop that would repeat the success story achieved in the United States. The crop was found to be the most profitable among all legume crops, capable of increasing farmers’ income by 88%. The protein efficiency ratio of soyabean was found to be 2.4 as compared with 1.7 for groundnut and from 1.5 to 1.7 for pulses. Farmers took to soyabean enthusiastically.

Government and agri-scientists expected people to quickly adopt soyabean nuggets, milk and dhal and thus create a win-win situation. Unfortunately, they reckoned without the complication of human taste. Consumers hated the taste and smell of soya products. Suddenly, there were no takers for the beans. Farmers in Uttar Pradesh abandoned soya and cultivation shifted to the less fertile areas of Madhya Pradesh and Maharashtra.

During this time, prices of edible oil in the domestic market began spiraling. Between 1977 and 1987, 40% of the edible oil consumed was imported. Even soyabean, with just 18% oil, began appearing like a viable option. Rather like tar sands when crude oil prices flared up. Overnight, what should have been a highly prized pulses crop, became an oilseed. Soyabean effectively conceded its comparative advantage in proteins and instead began competing against more oil-rich alternatives such as rapeseed mustard, sunflower and groundnut, leave alone palm oil.

To help farmers find a market, Madhya Pradesh offered a slew of incentives to entice investment. A large number of processing units cropped up in and around soyabean growing areas. Eventually, the installed capacity surpassed the supply of raw material. For a total harvest of 10 million tonnes, the crushing capacity available is 22 million tonnes. Madhya Pradesh alone can crush 15 million tonnes beans.

The business plan was to sell the oil locally taking advantage of sustained high prices. And since they lacked the technology for palatable protein foods, export the meal at a premium for non-GM status to South East Asian markets as feed. But it quickly blew a fuse.

Since soya oil yield is low, mills need to crush larger quantities to compete against rapeseed mustard and groundnut. Each year, soya oil has to wait till their supply dwindles for sales to gather momentum. The excess processing capacity has created a cutthroat fight for beans which raises the variable cost. Even so, most plants run at barely 40% capacity. The high cost structure makes Brazilian and US oil attractive.

Competition from palm oil can only be managed with higher import duties, at the cost of the poorest consumer segments. Given the spectre of food inflation, no government is willing to heed this demand. Meal exports are challenged by Brazil, Argentina and the USA in destination markets, especially when bumper harvests overcome the disadvantage of higher freight costs, such as this year. Domestic meal sales are dependent on demand from an equally fragmented poultry and feed industry.

Farmers can see that the industry is caught in this pincer of high costs and high competition. Thanks to greater staying power and correct price signals from futures market, farmers hold on to their beans for months, thereby further pushing up raw material prices. They have little interest in raising productivity because the high processing costs dampen the bean prices mills are willing to pay.

With slim hopes of higher farm-gate productivity, bankers baying at their heels, and steep fixed costs, majority mills are headed for closure or sale.

The crisis in soyabean is hardly unique. All industries caught on the wrong side of history due to the forces of comparative advantage, from US car companies to British textiles, went through similar throes.

And like USA and Europe, the escape route for Indian soyabean is also to go higher up the value chain. Most value is captured by the firm closest to the customer. In soya’s case, it is branded oils and protein foods. Companies such as Adani, Ruchi Soya and ITC, which early understood this, have been able to withstand competition and grow. The ability to learn faster than their competitors has given them the only sustainable competitive advantage.

But the opportunity remains large. Branded oils make up only a third of the total sales. It does, however, require a higher set of skills. Globalization makes the world more exciting, dangerous, or complicated depending on your point of view. Soya barons need to move from comparative advantage to perpetual advantage.

The journey starts by identifying the real problem. Reading David Ricardo may help.

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