No Finshots, it is not the data

Today, RBI kept the interest rates the same after a 3-day deliberation. 

Finshots is a email service/app that writes short journalistic pieces on the.. well, financial sector. 

In today's story, Finshots hypothesises that : 

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And an oft-cited criticism of the Reserve Bank of India is that it consistently fails to forecast inflation and growth rates accurately. According to the critics, this is a rather serious transgression on the part of the bank, mainly due to the fact that these numbers are then used to justify the monetary policy calibrations [changing interest rates etc]. How could the collective wisdom of the Monetary Policy Committee, the governor, the deputy governors, the modelling experts and other technical advisors all be so woefully inadequate to deal with what seems like a rather straightforward problem?

To answer that question we must first look at the data that’s used to predict these future outcomes. As Duvvuri Subbarao, the former Governor of the RBI points out — “The Reserve Bank operates within the universe of knowledge available in real-time, and that universe is largely shaped by data. If the data are reliable and available in good time, policy response can be accurate and confident. But the Reserve Bank is oftentimes wrong-footed because of the questionable quality of data.”

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Let me tell you a story. 

Naresh wanted to predict the rainfall this year. So, he took data from the last 20 years' rainfall - all 20 chaumasas with their comings and goings and everything in between. 

Then, he used a predictive index to say which day of the year will see how much rain. 

The statistical model predicted a deluge. People took precautions, businesses delayed new launches until after the deluge, and so on. 

But, that quote - Man proposes, God disposes, was not created in vain. The rains were normal, or below normal. People suffered that and criticised Naresh. 

A good friend came to meet him and asked him how he had configured his predictive model. Naresh said - the highest rainfall received on that date in any year was used to create the prediction of the expected rainfall in this year.  

Obviously, Naresh had all the data. He simply did not put the right analysis to that data. 

But why would anyone make such a huge mistake? Why not use something as simple and obvious as mode, or even mean rainfall? 

Because, Naresh had taken that model from a Cherrapunji based scientist. There, they prepare for excessive rains. So, they predict based on the highest they have ever got. Because the variance is not too high, it doesn't matter. They prepare for the worst and it works best for them. 

When we see that the model was created by a scientist in Cherrapunji, what appears to be absolute lack of reason, makes complete sense. 

End of story. 

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Why is that story relevant here? 

Because, the financial models we use to predict our numbers are created by economists who work in western economies. For over 200 years, everyone has been trying to fit our economy and its variables to a single universal format, guided by research in macro and behavioural economics. This research has been conducted in largely homogenous economies, with a defined set of cultural and social parameters. 

My hypothesis is, that if we want to understand the economy of India and how it interacts with macro economic policy variables, we have to understand how THIS economy functions. The government has often criticised the Indian trading community as being less than transparent. But is the government also not guilty of remaining ignorant about how the trading classes actually function, and then to create rules and laws that keep that in mind? 

The issue is not just with the data. The issue is that we have not invested in research to understand the model within which we operate. We report on numbers whose formulae are imported and have limited application in a complex economy like India. 

Examples: 

1. When the high denomination currency notes were banned overnight, no one expected the poorest of the poor to be so inconvenienced. BUT, they were. The preliminary, back of envelope calculation I did back then indicated the massive cash that flows through the bottom of pyramid. But because all this cash is completely undocumented, we cannot even include that data in our models, much less know what to do with it. 

2. Borrowing to spend on weddings and funerals is not listed anywhere as rational economic behaviour. No model of economics accounts for this. Yet, for at least 1000 years, Indians have borrowed routinely for weddings and funerals (if they are poor). What makes this even more perplexing is that this is the same society that gives 10% to charity and has among the highest family savings rates in the world. Why, then, do they borrow for weddings and funerals? (And now, for education) How does this indebtedness impact their disposable income and consumption? Their total income? Their nutrition? For how long does the impact last? 

3. How much does a country like India really need to spend on welfare medical facilities for all its people? What are the real medical needs of people who live every day with snake bites and dysentery?

4. In 2020, as spending was just not picking up, the government slashed savings rates. they hoped that this would lower credit rates, leading businesses to pick up cheap credit, and that would lead to economic activity. But that did not happen. Why? Economic activity picked up around Diwali. Why? I wrote about this in another post - the Indian does not borrow when there is an income squeeze. If the government had done the exact opposite - increased savings rates, that would have led to a perception of income in the mind of the consumer and would have spurred retail economic activity. Diwali is a time when retail activity has to go up. 

5. RRBs were created, at much cost, to replace the mahajans. Co-operatives were created to ensure that small Indian land holdings do not lead to low productivity. Neither worked. Vinobha Bhave, on the other hand, went from village to village and in a land-crazy country like India, made something like Bhoodan happen. But 7 decades later, Cooperatives still dont have large land packets. And 45 years later, the Mahajan still rules rural credit. The thing to do, was not to create RRBs. To get rid of the Mahajan system, one had to understand WHY the Mahajan system works and then decide whether the system needs fixing or replacement. 

The same thing goes for every economic system in India - the labour market, the sheer vastness of the unorganised sector, in all 3 sectors of the economy, the impact of the social structure on economic activity. In everything, we need to understand the model to weave it into our algorithm. 

The fault is not with RBI alone. Most economic reporting of India leaves out India (Sure, you can call it Bharat and snigger, but well, where's the money, honey?) 

It is written by people educated in Keynesian economics, read by people being educated in Keynesian economics, and criticised by people who base their criticism on fancy jargon and models of... you guessed it. 

India's policy making, macro economic indicators reporting, and indeed, our education of economics, cannot be conducted without understanding the native economic models of India.

On Wealth Creation and India..

Evening Thoughts:

From 712 to 1398 AD, The Arabs, Ghazni, Ghori and Taimur attacked India with the sole purpose of loot and plunder. The riches to be got from India were enough to cover the costs of raising an army, having it cross the mighty Hindukush, fight, and go back all the way, and still make a profit.

From 1600 AD onwards, The British, French, Portuguese, and Dutch East India Companies were created for the sole purpose of 'trading' with India and partaking of the wealth of India. That lasted 300 years.

Within 73 years of Independence, India is the world's sixth largest economy.

If we want to learn the secret of consistent creation of wealth, perhaps, we should look inwards?

The other thing we should learn from India and Russia is the concentration of wealth. It was because wealth was concentrated - first, in the temples, then in the ruling and trading classes, that it became easier to plunder from India. If the wealth was well distributed, the effort required to get that wealth would also have been higher, and perhaps, not worth it so much.

What do you think?

The Indian Farmer conundrum

And once again, we are right where we began.

"Give them cheap credit."

"Farm loan waiver is a must."...

Sit back and think about it.Independence happened 72 years ago. In 72 years, we have not been able to create the infrastructure and the policy regime that allows the Indian farmer to break out of the debt trap. If anything, we are deepening their dependence on debt through this behavioural reinforcement of "Farm loan waiver required to win elections."

Let's think about it: Farming is an industry. It should be profit positive. Why does it need subsidies? Why is it so loan dependant? Does the farmer really need the loan and the subsidy? 

In 72 years, and particularly under the Green Revolution, the government has been able to successfully create a nation-wide supply chain of:
A . GM/"High-yield"/ Hybrid seeds
B.  Fertilisers, and
C. Pesticides
- forcing farmers to give up their traditional "inefficient" farming practices and ensuring their inevitable dependence on expensive farm inputs - fertiliser, seed, pesticide. (Ergo - Need for Debt) 

BUT, we have not been able to create a nation wide network of:
A. Irrigation channels  - reduces input costs and dependence on power to use the tubewells.
B. Cold Storage

- The two things that would have helped the farmer to actually increase margins, gain staying power in the market, and reduce input costs. (Ergo - Inability to earn enough to repay that debt) 

Why is that? 
BECAUSE:
1. It is NOT PROFITABLE to let the Indian farmer be economically viable. The minute you do that, you take away their status as the vote bank.
2. Union Carbide benefits from pesticide production. Monsanto benefits from GM seeds. Farmers benefit from cold storage facilities. There is no party donation money in that.
3. The farmers themselves find the benefits much easier than the hard work. Instead of demanding farm loan waiver, why did they not ask for subsidy for temperature controlled warehouses and transport vehicles? They all have a fridge at home. They all know the difference it will make if they release their pulses in the market when the price is high, vs if they release it when the harvest has just come.

If the farmer is able to hold on to his produce, the entire corrupt system created by the agricultural marketing industry collapses. 

So, my vote is for that cold storage chain that benefits the farmers, and for a nation-wide irrigation network based on canals and natural river flow OR allowing the farmers to go back to traditional water harvesting methods which are not energy intensive. They were not subsidy dependant. We made them subsidy dependant to become food secure as a country. 

The Butterfly Effect

The IIP was at 4.4% for the April-Mar2018 month. 


This was the result of a long journey, as macro numbers usually are.


A couple of years ago, a need was felt to increase tax collections. There were 2 obvious ways to do it - 1. Increase the tax payers' base, and 2. Keep tax rates high or raise them further on at least some items.
Obviously, the most direct effect of that was on the middle class.


Here are the 2 things that the government did not prepare for:
1. Faced with a strange tax regime and the suspicion placed upon all high value purchases, the middle classes will pull their purse strings tight.
2. The sheer magnitude of the Indian middle class, and the butterfly effect action(1) above will have on the rest of the economy.


The squeeze was on the individual, but observe the Domino effect...




The Domino Effect on the economy of squeezing the middle class under taxation

Everyone made small changes. Someone stopped eating out as often. Someone else postponed a big TV purchase. Someone stopped the tuition teacher. But the numbers of the Indian middle class are such that even one action by one household (and it was not as tiny as that) led to a huge overall impact.


How big is the Indian middle class? Find out for yourself:
https://www.economist.com/briefing/2018/01/11/indias-missing-middle-class


http://www.bbc.com/news/world-asia-india-41264072


https://www.livemint.com/Opinion/TvcFydQcN6KEFkvdW7BprM/Indias-burgeoning-middle-class.html

New Taxation that I would like to see

Everyone is saying that Income Tax rates are too high. I agree. I believe it is time to move from individual earning taxation to taxing on the basis of the burden an individual puts on the ecosystem.


So these are the 2 taxes I want:
1. Children Tax: The state allows you to have 2 children. You want more than that, you better be able to afford them and compensate for their carbon footprint on the world.


There's more: In a Christian wedding, before you get married, you have to undergo mandatory counselling in the church. I believe this is an excellent way to prepare people for life changes. There should be a mandatory mental fitness test that parents should have to pass before they have children. This will put an end to people who have kids just to get rid of pesky relatives. If you don't have it in you to be responsible for a child for 18 years, then please don't have children.


While adoptive parents have to prove a thousand things, the State takes no measures to ensure the safety and well being of biologically born children. If a couple is not fit to be a parent - they should not be allowed to have children. Because children are a nation's collective resource. And no child should be abused or ignored by indifferent parenting. Parenting is not a right or a fertility contest. Its a responsibility. If you can't take it, have the courage to tell your families. And to yourself.


2. Trash Tax: A person should be taxed on the basis of how much trash they generate. Commercial establishments too. This will ensure that 5 star hotels start serving their guests water in glass tumblers instead of generating plastic waste for every 200 ml of water their guests drink. This will ensure that people think before they buy. A mindful consumer will be rewarded in this way and the environment will be automatically better. Amazon will start shipping in containers that actually match the product being shipped. And people will learn to not waste food. If you do not do waste segregation at source, you should have to pay extra because someone else has to do it for you.


The Trash Tax will reduce consumerism, and therefore, will be bitterly opposed by the major companies of the world. I think it is time we decided, as a species, which we need more - the world, or the  growth of the companies.


The world has enough for our need, not enough for our greed. - This quote is usually attributed to Gandhi.

The Unaccounted money at the bottom of the pyramid

Background Information:
Only 1% of India's population pays income tax. The tax rate slab in India is 2.4 lacs for adults for the current financial year. Agriculture , which is a tax exempt sector, employs  about 57% of India's population. This means that of the remaining 43% of the population, 42% earn less than 2.4 lacs a year.

The Trigger:
On 8th November, 2016, something changed in India. By some estimates, 85% of our currency became invalid overnight.


The queues since then - mostly composed of the underprivileged, made all of us uncomfortable. Some of them had been paid to stand in that line. But a lot of others were there because they were a part of an all cash economy.


As time passed and the queues did not get any shorter, it set me thinking about the real size of the cash economy at the bottom of the pyramid. How much cash is really there at the bottom of the pyramid, that is not entering the system at all? (And is, therefore, black money)?


So, this morning, I did some back of envelope calculations, hoping to get some sense of the all cash economy that hides at the bottom of the pyramid


The bottom of the pyramid has its own hierarchy(see note below).


For my analysis, I decided to focus only on the primary income generators, as a reliable measure of  cash at the bottom of the pyramid. This is because B and C re-use the cash generated by A. They may add to the size of the economy, but I am interested in the size of the cash chest alone. The size of the economy will be about 2 or 3 times the size of the cash chest as the money gets recycled.


Determining the Set of Primary Income Generators
After this, I zeroed in on some occupations where I have some idea of the margins, daily income, ticket size et al. 


Methodology
I just followed very simple back of envelope calculation. So, average order/ ticket size, no. of orders per day, margins (because according to Indian tax law, business is allowed to deduct expenses before arriving at income) and no. of working days per annum.


For monthly workers, I used average income per month, plus additional income (bonuses, overtime etc).


At first, I couldn't believe the numbers that appeared on that screen. So I did some more changes - reduced the working days, reduced the no. of tickets per day and so on. Even with all the changes, at the most conservative, this is how it appears.


The size of the all cash economy at the bottom of the pyramid - 2016 December

That number in INR Today is 562590 Million INR. i.e.,: 562590000000 or 562 Billion INR.



Notes:
1. This is only for a few selected occupations.


2. The number of 1000/2000/5000 vendors per city is obviously very low.




3. The hierarchy at the bottom of the pyramid:
A. Primary Income generators
These are the people who generate income from the economy and bring it to the bottom of the pyramid. Think: Vegetable vendors, pan wallas, small grocery shop owners, dhobis, malis, parking stand boys, domestic staff,  other service providers. In the money cycle, think of this as the point at which wealth enters the bottom of the pyramid.


B. Secondary Income Recyclers
These are the people who then use that money to support the bottom of the pyramid economy. Think landlords, service providers to the poor, alcohol thekas et al.


C. Consumers
These are the people who have the spending power at the bottom of the pyramid. Think home decision makers, consumers et al.


4. No. of cities in India as in 2011: 497. I have used the number of 450 for this analysis.

Population Tax

I have this bright idea.. instead of income tax, we should have a population tax. Why? Simple. When we tax income, we are taking away from people who succeed. We are not taxing the use of our resources. But every child that is born taxes the resources of the country. And its time to start taxing them.

The thought was honestly a continuum of that post where a 2 year old child was out in the cold and adult women sitting near him were clad in shawls. These children are brought into the world so they can be free farm labor, free begging resources. Not to be loved, cherished, and nurtured, but to be used, abused and left to fend for themselves.

So methinks, in a country where female foetuses are killed bcs they will ask for dowry in some years, what is the fastest way to dissuage this practice which doesn't help anyone? And pat the answer came - start taxing them for producing more children, make it impossible to receive any govt benefits unless the child is registered, and you have a winner. nothing succeeds like money.

 

Demographic Dividend - more people means more jobs

This post is going to be short - because the point is simple, and other people have made it before me.

The idea of Demographic Dividend assumes that more people in a certain age group will mean more jobs and more income for the country.

However, this assumption has another underlying assumption - that the more people entering the workforce are all "employable" - i.e., they have the skills, attitude and infrastructure to enter the workforce and be productive.

Skill
There is global skill shortage. This report indicates that India has a skill shortage. But the skill shortage is way more than what is here. According to another research paper read elsewhere, the gap between skill requirements and skill training - esp in vocational skills, is very high.

Infrastructure
30% of the population lives in urban areas. An even smaller population in metros. The share of GDP from urban areas is 52%. This means that at least 70% of India's "Demographic dividend" lives in a place where it cannot be optimally employed because the infrastructure is not suited to high productivity employment. If we take away the non metro cities (Realistically, the non metro cities do not have  very conducive infrastructure) , then this gap surges even more.

Attitude
aka the Indian Work Ethic. Perhaps its a matter of global concern, but the Indian Work ethic just keeps getting worse among knowledge workers and students looking to land knowledge jobs.
This report has some key figures for us. This and this deserves to be read too.

So, the short point is, that the Indian worker may be looking for employment, but that does not automatically make him/her employable.

And therefore, the Demographic Dividend tempo must be tempered to be closer to reality. The reality may not be bleak, but if we dont stop bursting at the seams, we are very likely to burst right down the middle.

End of story. 

 

Demographic Dividend or Population Problem - Keeping them safe...

The third thing we spoke about in managing 14% of the world's population on 2% of area, was their physical safety.
Luckily for us, the National Crime Records Bureau has put all the statistics online - from 1953 onwards!

In addition to the numbers we see on this site, and their relevant correlations with the population, economic disparity and other factors, there is one more variable that we need to consider - the incidence of reporting. We know that the state of crime is bad in India. We know that the number of undertrial cases pending in our courts is staggering. We dont even need to see the numbers to know that in spite of trying our best, we as a country do NOT have the infrastructure required to :

1. Proactively predict and prevent crime
2. Find the guilty after the crime has been committed
3. Take the accused through a fair judicial process within "reasonable time" (Please note, we are not using the word "quickly" here. Just reasonable time, and even that is too much to ask for)
4. Once there is a verdict, one way or another, there is an administration system - ensuring that prisons are places that humans can inhabit, ensuring the parole system and where relevant, the rehabilitation system.

We simply have failed on each one of these necessary and vital actions of the state.

Irrespective of what we might think is the "ideal" population for a country like India, we do know that the current population levels are far, far above that "ideal" number.

At current numbers, we are unable to provide basic citizenship amenities. Governance, though an important part of the equation, is NOT the sole culprit.

What we have here is a classic situation of too few resources and too many claimaints to those resources. Any government can only try to optimise the allocation of resources, but the challenges we put to our governments are huge. And our ask is quite simply, impossible. At these numbers, we are tearing at the seams and about to burst.

In the next post, we will discuss nother assumption that one often hears in the Demographic Dividend context - more people mean more jobs and higher income.  

Demographic Dividend or Population Problem - Incomes

In the previous post, I spoke about the second factor required to maintain population in a country -per capita income. aka, enough money to keep body and soul together.

In that piece, we spoke about the impact of individual choices on family incomes and standards of living. These individual choices aggregate as national poverty statistics. The worst part of these wrong choices is that they lead to actual child abuse meted out by parents. But there is very little punitive action against parents who are responsible for abuse and child labour by their children.

In this piece, lets look at the per capita income and population from a different perspective. I googled to find out if a study has happened on the impact of family size on per head income in the family.

Here is a chart taken from a book called Human Development in India:




Image Courtesy - book Human Development in India

Lets break down this total income into per capita income by family size.

If the family has:
1 member : per capita income i likely to be 13435

At 2 members, however, that number is not 26870, it is 24000. Per capita income - 12000

3 members : per capita income - 10067 INR

4 member : per capita income - 9863 INR

5 member: per capita income - 10510 INR

we cannot calculate per capita income because the report says 6+, so the number could be for 6 member households or 11 member households.

So, with every member that we add to the family, our average per capita income diminishes almost uniformly, except for one spike at family size of 5.

Ceveat: The book mentions that because of economies of scale, a large family living together will spend less and so their total net worth will be higher..

Endpoint: A bigger family by itself does not mean higher income for the family. More people do not, by definition mean higher income for the country.

Demographic Dividend or Population Problem - Impact of Individual Decisions on the country's GDP

The second thing I spoke about was Per capita income aka an ability to make enough money to make ends meet.

Every time we talk about poverty, we talk about the failure of poverty alleviation problems. But the question we also need to ask is:
Why do we need poverty alleviation programs?

It is the state's job to provide administration. Perhaps, in a welfare state, also to provide health care.

But why is the government's job to ensure that you are not a poor person? Where is the individual's responsibility?

Lets ask a question: What makes a poor person a poor person?
There are no easy answers. The favorite answers are destiny and lack of opportunity because of social bias.

But lets try to understand a story. This is the story of Manglu, a poor child from remote any-part-of-india who comes to a big city, works as a rag picker, makes a very little money, lives in barely habitable conditions. Then, Manglu gets married and has children. And more children. Because more hands to work means more money. He forgets that part of the equation which says that more children also mean more mouths to feed. Now, he has 5 mouths to feed, and maybe 4 earning members in the family, but only 1 adult earning member, since the mother has to take care of the 3 children. Even if she is employed, she is under employed. and the children make very little money, even if all 3 are put to work. In addition, there is malnutrition and frequent illness.

Contrast that with another story. This is of Pappu. Same background as Manglu. Comes to city, works as rag picker, gets married. Except, that he has only one child, and is determined to send this child to school. Now, Pappu has 2 earning members and 3 mouths to feed. And a school going child whose earning potential is way above the combined earning potential of his parents if he continues in school.

The government did not give birth to Manglu's children. Nor is it responsible for his flawed thinking. The government cannot be blamed for lack of common sense. The government is not responsible for parents who push their children into child labour. Nay, people who bring children into the world with the specific intention that they will work as soon as they can walk, or latest by the age of 5.

What the government is responsible for, however, is punishing people who are responsible for child labour - even if it is the parents themselves.

In appeasing the adults who are potential voters, the government has failed the children by not protecting them from abuse meted out by parents.

Poverty Alleviation programs are an anomaly.

It is also unfortunate for India that instead of harping on the failure of povery alleviation programs, we do not ask questions on the continued need for these programs. If they were effective cures for poverty, surely 60 years is long enough to wait. And at the end of 60 years, poverty is unmoved. Maybe we are applying the wrong combination of medicine? Perhaps it is time we made people responsible for their financial state, at least in part?

Demographic Dividend or Population Problem ?

I love these big sounding words - Demographic Dividend. And how India is all ready for greatness and all that because of this "demographic dividend" and all that.

So i did what i normally do on these occasions (meaning when one is totally lost) - google god.
It turns out, that Demographic dividend was not what i thought at all! Its not just that we have more people, but that we have more young people, who can potentially earn and add to our GDP.

See, what a lovely idea! Take a look at this if you dont believe me.

Except, i dont agree. There are some very basic flaws with the assumption that:
A. More people means more money or higher GDP
B. More people is a good idea by itself.

India is the 7th largest and the 2nd most populous country in the world. We have 2% of the world's land area. And we have 14.28% of the world's population. That is only based on the no. of Indians living in India. We support 14% of the world's population on 2% of the world's land. Does that tell you anything?

Different estimates indicate that we will overtake China anytime from 2015 to 2050. But no study anywhere indicates that we will become the 6th largest country anytime soon. Or that our land area will increase.

Why is that important?
This is why.

To sustain a population,we need some basic things:
1. Food
2. Money (aka Per Capita Income)
3. Physical Security

Food
The average land holding in India is 1.16 hectares, down from 1.34 hectares in 2000-1. About 80% of our cultivated area is used to grow basic food items. Around 50% of our land area is used for agriculture. Though we are among the highest producers of several basic food items, our productivity is way below global numbers.

These numbers do not indicate a healthy trend towards feeding our people. Accounting for economic disparity, it is a fact that thousands of Indians are literally starving to their deaths.  There is a number to it - 7000 Indians starve to their death every day. And 25 Lakh every year. One third of the world's hungry people live in India. One third. Way above our national average of one seventh of the world's population.

This is how bad it is.

We may have the food, but we simply do not have the mechanism to feed all the mouths we give birth to. The shrinking average land holding is a reality directly caused by population.

 

The Grandmother and the billion dollar company

As we write, Twitter is likely to be valued at 11 billion. Facebook's current market cap, according to this article, is at 100 billion.

If you were an old grandmother somewhere in (any part of the world), who was a nosy Parker and knew something about everyone's affairs, obviously you could guide a traveling salesman to the house that is most likely to buy the stuff he peddles. But the question is, how much would that traveling salesman be willing to pay you for that information?

And the answer is - 100 billion? 11 billion? 340 billion?

What is the point? Bear with me while we explain this.

The economic value of social capital is a very new phenomenon for the human civilisation. Social capital has always existed, and has helped society immensely - as traditional medicine, gossip (and what would we be without gossip?) , product recommendations from friends (remember Amway and Avon?) .. et al.

For the first time, we see a price - a very substantial, tangible price, being put on the notional value of this information.

Is this information, inherently, worth the price we put on it? How much more do companies sell on targeted advertising vs generic advertising?

I do not have an answer. Given the size of global commerce, the numbers could be too low, or too high, depending on that crucial factor - IS the grandmother's knowledge of which house to go to, leading to a sale?

And i really think we should pause and ponder.
Social capital also has a social cost.

Agricultural Sector Reform

Without going into the details of why, here is what I propose:
1. There should be no control price on procurement.

2. There should be no subsidies on inputs. All inputs must be governed by market prices. i.e., Fertiliser Corporation of India must continue to supply fertilizer, but it must be forced to cut its own costs to stay price competitive.
3. Food Corporation of India(FCI) must be forced to compete with other market players to procure at market prices. Minimum Support Price must be the least amount at which a sale can happen in a government regulated market.
4. There should be public-private partnership to create a chain of warehouses. The pricing mechanism should be such that the farmer does not pay for the storage – the procurer pays. What this means is that the longer a produce is in the warehouse, the more the bill of the procurer. This will transfer the pressure of selling from the farmer to the buyer. Also, since the farmer does not stand to gain anything by keeping the produce for long in the warehouse, and in fact loses liquidity and negotiation advantage, he will also be interested in reaching an early deal, but will not be under pressure to do so.

5. Once the procurement has been completed by the FCI(Food Corporation of India), the produce must be transferred to a central nodal distribution agency, which could be a part of FCI. There have to be 2 parallel distribution mechanisms – one for perishable primary produce like fruits and vegetables, and the other for staples and cereals.

6. The distribution is done at subsidized prices. The Govt. of India, along with the states, bears the differential between procurement prices and distribution prices. The more the demand-supply gap in a state, the more its burden of subsidizing.

7. Not every citizen should be expected to have a ration card. A ration card should be authorisation to get produce from the subsidized PDS. For identity proof, the voter ID card or an alternative for minors should be used.

8. Any leakage is the responsibility of FCI’s distribution wing, and the respective governments.

9. Until there is stabilisation of logistics on the ground, all speculative acitivity in these commodities should be made illegal.

What this arrangement will hopefully do:1. Stop the starvation deaths of farmers.
2. Introduce corporatisation of agriculture that goes a step beyond contract farming.
3. Plug the multiple infusion of subsidy and introduce a single injection point of money form the government to the food distribution mechanism of India. This hopefully means less corruption, or at least all corruption concentrated at one point. This also means more accountability of the nodal agency and an ability to place the blame where it should lie.
4. Make available both perishable farm produce and staples at a less price to the BPL citizens of India. Currently, the public distribution system (PDS) only takes care of staples.

Remember elementary Maths? We started with an equation that went:
CP+P = SP

CP – Cost Price
P – Profit
SP - Sales Price.

Now, assume a section where "SP is less than CP" i.e., cost of production is higher than the selling price . Assume further that this "SP less than CP" is not because of market dynamics, but because of government regulations.

That means, that the equation now looks like this:
CP + -(P) = SP
-(P) obviously refers to the continual, unending loss being made by the sector.

However, to correct this situation, the government does this:
CP = CP1 + S.CP1 - Actual cost borne by the producer.
S – Subsidies.
i.e., we will provide part of your expenditure, such that you do not suffer a loss.
In this, the assumption is that, at least, S is provided to the extent where CP1 becomes less than SP. (i.e., the producer's cost is less than the controlled selling price)

Flawed Assumption #1: "CP1 less than SP. "

Suppose further that the amount of S as per the government’s books is XXXXX, but the amount that actually gets disbursed as S is XXX. i.e.,

CP = CP1+ XXXXX – in the books of the state.

CP = CP1 + XXX for the producers.

Axiom – CP1 must rise to the extent that S is reduced, because the cost of production is not impacted by the availability of subsidies. If the state does not bear the cost, the producer must.

The government fixes SP on the basis of equation 1 above. (CP = CP1 + XXXXX) but the farmer has to bear CP to a much higher extent.

Therefore, no matter what the quantum of S, because of the inherent flaw in the process of calculation, the government will never find out the exact S required, and will also, never be able to fix a SP such that the producer suffers no loss.

That, imho, ladies and gentlemen, is one of the main problems with the Indian agriculture sector.

And if that stupidly drafted post made no sense, all one is trying to say is that control prices in agriculture go against a very basic principle of economics, where a producer must get returns for his efforts.