Restrictive government policies and their ill-effects on prices

The good intentions of government bureaucrats are heavily implicated in the massive distortions and volatility of all market categories over the past five years. One policy creates a bubble and another attempts to ameliorate the effects, each one making the gyrations worse

Governments purport to act for the benefit of their citizens. Their laws, regulations and policies are supposed to protect them. They also like to pretend that they can protect them from markets. Usually it is the other way around. Markets operate for the benefit of citizens and markets need protection from governments. Often government policies, implemented with the best intentions, backfire. The policies can create a bubble. Although these bubbles victimize the very citizens the government is trying to protect, they can be very profitable for investors. One of the most egregious recent examples has to do with rice.

Rice is the staple crop for half the world’s population. The world grows about 450 million tonnes annually, but the amount available for international trade is only about 7% of the total crop. This is tiny compared with 20% or so of the world’s wheat crop available for sale. So little reaches the market because it is considered a strategic food in many countries. Governments consider it so vital for their survival that they make sure that it under their control. Domestic markets are heavily regulated and protected in order to encourage self sufficiency. The world’s largest producer is China, but its 130 million tonne crop is not for sale. The top exporters are Thailand and Vietnam, but together they export only about 17 million tonnes. India grew about 95 million tonnes in 2010-2011, but exported only slightly less than 4 million.

In 2007 the price of wheat started rising. For most of the decade it sold for about $200 a metric tonne, but by September it was over $300. Countries started to panic. To maintain low prices for domestic supply, they restricted exports and lowered tariffs for imports. With the restricted supply the price rose further and hit an all time high of over $439 a metric tonne in February 2008. Since one bubble wasn’t enough, governments thought they would create another.

When wheat became too expensive the Indian government decided to purchase more rice for its food programmes. In October 2007, it banned the export of rice. At the time rice was plentiful. Farmers around the world were harvesting record crops, but because of the restrictions much of this crop was not available for global markets. So the price rose.

As the price rose, so did the panic and restrictive government policies. Egypt, Pakistan, and most importantly Vietnam joined India and restricted the export of rice. From a price of about $300 a metric tonne in 2006, the price soared to over $1,000. The panic then hit consumers. In Vietnam rice markets and supermarkets were cleaned out. Even in the US stores Wal Mart limited rice to four 20-pound bags per customer. The insanity was due only to governments. There was still plenty of rice sometimes in the strangest places.

As a result of a trade dispute between Japan and the US, there were over a million tonnes of American rice sitting in Japanese warehouses. Like other Asian nations, Japan protects its rice farmers. They had no interest in using the rice domestically. They imported it only because the World Trade Organization told them to. Thanks to some lobbying by a US economist and a rice trader, the US and Japan agreed to release some of the rice onto the market in mid-May 2008. The announcement of the release was sufficient to prick the bubble.

Fast forward to 2011. India and Pakistan are having a good year. Both countries have large surpluses, so good that in fact that India in September agreed to lift the export ban. This was fortunate because droughts in the US and floods in Thailand have hit both countries exports, but these problems won’t help Indian farmers and traders. The traders were so afraid that the Indian ban would be reinstated that they sold their rice at rock bottom prices a month before the Thai floods drove the price up.

The implications of this story for investors are enormous. This isn’t just the story of the disastrous unintended consequences of a few well meaning, but incompetent Indian babus. Economists, financial analysts, and money managers all assume that prices and markets are driven by market forces like supply and demand. The reality is that these forces may be irrelevant in the short-term. During the 2008 food crisis, the newspapers were filled with stories about shifts in global demand due to a wealthier Asia. The reality was something simpler and less profound.   

The good intentions of government bureaucrats are heavily implicated in the massive distortions and volatility of all market categories over the past five years. One policy creates a bubble and another attempts to ameliorate the effects, each one making the gyrations worse. For investors the profit comes from understanding these mistakes and not economic forecasts.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]). 


Deepak Parekh and Ashok Ganguly support of FDI in retail

Deepak Parek, Chairman of HDFC and Dr Ashok Ganguly, former chairman of Hindustan Lever and member of Rajya Sabha, have jointly issued a statement on Sunday afternoon supporting the government move to invite foreign investment in retailing

Even as the government is dithering about its decision to open up the retailing sector for Foreign Direct Investment and is all set to defer the ill-timed decision, two well respected businessmen have issued a joint statement supporting the government move. The statement makes the important point that retailing is a tough business "margins are thin, large parcels of real estate are not easily available and the supply chain logistics ranging from warehousing, cold storage to transportation pose a major challenge." Hence, argue Mr Parekh and Dr it is"illusory to believe that the market will be flooded with FDI." Here is the full text of the statement  

"India always  prided itself on its vibrant democracy. It was large and noisy, but it worked. Today, there is concern over India’s overall economic slowdown.  From ambitions  of double digit GDP growth rates, the slide has been swift. Yet in the broader scheme of things, a slowing economy seems to pale in comparison to the larger crisis at hand – that of a Parliament that is  completely unable to function in the way these sacred institutions were set  up  to  be. A democracy encourages openness and permits dissent, but perennial  disarray and disruption is sacrilegious.  So  as  the nation interminably and unproductively  quarrels  about ‘India’s  tryst  with destiny’, the more important question is how should some semblance of order be restored in Parliament?

During  the  course  of the year, sections of Corporate India together wit the common man raised its voice over many misgivings of the government. Th government  of  the day gave a hearing and remedial action, though in small measure, was initiated. Many  concerned  with the prospects of Corporate India said  stem the slowdown, increase investments, bring in new reforms. No  one objected till then. But when the Government began to act, what have we,  but chaos  and  adjournments  over a decision to allow foreign direct investment (FDI) in retail. 

There are 32 bills in this winter session of Parliament for consideration and passing, many  of which are of far greater consequence and importance for the country  than  FDI  in  retail. The protests on FDI in retail are misconceived and unfortunate, but hope to salvage this situation should not be lost. 

FDI in retail has not been a sudden decision taken by the government. On the contrary, the  idea  has  been toyed with for over 14 years. Detailed discussions with various stakeholders have been held, experts consulted and studies commissioned  based  on  international  experiences  of  organised retailing.

Modernisation of retail trade is an essential part of India’s growth story.  It  is well known, from experiences of countries such as China, Indonesia and  several others, that modern retail trade and traditional traders can, and  do,  prosper  side by side, raising employment along the supply chain, improving   farm  incomes, reducing  spoilage  and delivering affordable products to consumers. 

Opposing  investment  in modern retail for the sake of it is only defending vested interests to the detriment of the vast majority.  The farmers, the consumers  and the common people must raise their voices against this false drama of apprehension  against investment  and  modernising  trade  in agriculture  and consumer goods. For example, in a district which grows the largest amount of potatoes in the country, more than 50% rots in the fields due to inadequate cold storage facility and supply chain, to utter distress of  the  farmers and at the cost to the end consumers. There are thousands of similar events every year across the country.

What  is  intriguing  and  bewildering  is  that  the false alarm of FDI is continuing  to  be used  after  so  many years, as a bogey in modern times against foreigners  and  foreign investment.  It is completely deluded to argue  that kirana  shops  will  be wiped out with the onslaught of FDI in retail. What  does hurt  the  kirana shops are them having to down their shutters to support bandhs.

It  is  important  to  articulate  the  economics  of  FDI in retail. It is illusory  to believe that the market will be flooded with FDI. Retailing is not  an  easy business – margins are thin, large parcels of real estate are not easily available and  the  supply  chain  logistics ranging  from warehousing,  cold  storage  to transportation pose a major challenge. More importantly,  the  central government’s role in retail FDI is minimal. The greater onus lies with the state governments as a maze of laws ranging from Shops  and Establishments Act to the APMC Act, amongst several others falls within  the  state’s domain. Progressive states that wish to attract FDI in retail will encourage investments and vice versa. Either way, the fruits of organised retailing will not happen overnight, but will take several years.

To  conclude,  this  is  a call to the saner sections of Corporate India to come  out and strongly  support progressive measures and reforms with the same  spirit  and gusto  with which  we  take  the liberties to criticise policies or issues we do not appreciate."




suresh kumar gupta

6 years ago

Hon sir I am certified financial consultant of HDFC STANDARD LIFE INSURANCE CO LTD Mumabi. my code number is 00041214 My request you as under. 1, Company has terminate me on the basis of false complaint of LOCAL STAFF i.e. BALOTRA branch 2. The both person has left the company 3. Due to my termination and lake of services my innocent client has lost almost 20 lakha INR AND POLICY HAS DEACTIVATED. 4. I very humbly request to company to provide the letters/emails/on which basis the company has terminate me but company has not provide the papers. 5.i also pray to company to provide the clause of agency agreement on which basis i have voilete this clouse but company has not replied my a singal word. Pl help to resolve my issue and reach a free and fair investigation in the interest of INNOCENT CLIENTS
the CEO OF HDFC SLIC MR.AMITABH CHAUDHARY mail id is [email protected]

Madhusudan Thakkar

6 years ago

Deepak Parekh & Co. are working as AGENTS of FDI.If they are so concerned about investments why have these people not spoken anything about fate of Postal agents who have been rendered jobless after recent decision by Govt.of scrapping their commission?On earlier occasion also they were silent on SEBI arbitrary role on commission issue of mutual fund agents. These people are acting as spokespersons of rich & powerful.We all know how Niira Radia operated.


6 years ago

Will the fooeign retailers like Walmart, Carrefour, TESCO etc, only source their requirements from India?

Its a ploy to bring cheap chinese products to the Indian market. May be china is behind these big players to push India to open the retail sector for FDI.

Weak Upmove: Weekly Market Report

Nifty to range between 4,900 and 5,170 for the week

The market brushed aside negative economic indicators on the domestic front and took support from positive global cues this week. The indices ended in the positive on four of the five trading days with FII inflows gathering pace on the last three days. The market notched gains of 7% in the week, ending its four-week losing streak.

The Sensex jumped 1,151 points to close the week at 16,847 and the Nifty settled 340 points higher at 5,050. The market rally is likely to see some correction if the Nifty is not able to maintain above its current high.

Positive global cues helped the market close higher on Monday, reversing the decline in the earlier two weeks. However, the political impasse over the government’s proposal to allow 51% FDI in multi-brand retail saw the indices closing lower on Tuesday. The market factored in the dismal GDP numbers for the September quarter and managed a green close on Wednesday. Efforts of the top six central banks to provide cheaper liquidity to European banks lifted the market on Thursday while across-the-board institutional buying helped the indices settle higher on Friday.  

All sectoral indices closed in the positive with BSE Metal (up 11%) and BSE Bankex (up 8%) were the top gainers, while BSE Healthcare (up 3%) and BSE Consumer Durables (up 2%) settled at the bottom of the list.

The top five Sensex stocks were Hindalco Industries (up 19%), Tata Steel, State Bank of India (up 12% each), Tata Motors and Jaiprakash Associates (up 11% each). There were no losers this week.

The Nifty was led by Hindalco Ind (up 19%), Tata Steel, Tata Motors, SBI (up 12% each) and Reliance Communications (up 11%).

The economy expanded at the slowest pace in two years at 6.9% in the September quarter of the current fiscal, compared to 7.7% in the first quarter of FY11-12. For the first half of the fiscal, the gross domestic product (GDP) growth rate stood at 7.3%. Policymakers and analysts have pegged GDP growth for the full fiscal between 7.1%-7.5%.

From a peak of 82% in July, export growth slipped to 44.25% in August, 36.36% in September and 10.8% in October, the lowest since October 2009, when it contracted by 6.6%. Imports grew at a faster rate of 21.7% to $39.5 billion leaving a trade deficit of $19.6 billion, the highest ever in any month in the last four years.

Commerce secretary Rahul Khullar has expressed concerns over the increasing balance of trade and said that at this rate, it may breach $150 billion mark during 2011-12.

Encouraged by a steep fall in food inflation to 8%, finance minister Pranab Mukherjee said the overall rate of price rise will moderate to around 6%-7% by March 2012. Food inflation declined to 8% for the week ended 19th November from 9.01% in the previous week.

Growth of eight infrastructure industries—crude oil, petroleum refinery products, natural gas, fertilisers, coal, electricity, cement and finished steel—slowed down to 0.1% in October this year, from 7.2% expansion witnessed in the same month last year. Barring electricity, cement and steel, all the remaining segments registered negative growth in the month under review.

On the global front, the US unemployment rate tumbled to a two-and-half year low of 8.6% in November, from 9% in October. The news could temper the appetite among some Federal Reserve officials to ease monetary policy further. The report also dampened speculation that Federal Reserve in its meeting on 13th December will embark on another round of large-scale asset purchases.

Seeking to halt the euro’s drift towards collapse, German chancellor Angela Merkel on Friday took steps to calm the financial markets when she said it was time to stop talking about a fiscal union and start creating one. Interest rates on Italian and Spanish government borrowing fell sharply on Friday and markets rose on hopes that the leaders are taking the euro crisis seriously and are working towards avoiding a breakup of the EU.


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