Inflation & agricultural produce

Inflation has been in news in India for a very long time. While the reserve bank is doing its best to tame inflation by increasing the rates, unfortunately the government of india is doing nothing to tacke inflation, mainly food products.

Inflation generally is due to lack of supply of products or increase in buying power of people (increase in supply of money). Economic theory states that by curbing the money flow or making the cost of funds higher inflation can be curbed. This is generally true for inflation other than food articles. Primary food articles prices can be brought down only by increasing the supply.

Government actions so far has been lacklustre, with no coordinated effort to increase supply. The key actions here will be to invest more in agriculture sector - investment is urgent in large scale irrigation projects, cold storage chains, reducing middlemen to drive down prices and increase efficiency of distribution of grains through both public distribution system (PDS) and private channels.

The goverment is clearly falling short in all of these areas. The whole subcontinent is dependent on monsoon for agriculture. We have seen cycles of drought and flood which have played havoc on production over the last several years. We need to have good irrigation facilities to store and use water for agriculture. Look at new technologies which will improve the per hectare output. A second green revolultion is a must now. If not, there will be a crisis in the next 20 years.

In the budget presented in March 2011, increasing cold storage chains as well as making it an infrastructure area for focus meant that there is going to be major focus and investment in these areas. But unfortunately, not much has happened. The public sector is not doing much here either. We need the government along with private players to join hands and invest in setting up cold storage chains. We cannot allow our produce to rot just because we do not have enough storage facilities.

The PDS has been an area of concern. We read several reports in the media on food grains rotting in food corporation warehouses, railway stations, open storage places etc and the only action taken is to suspend a few officials. The PDS along with storage will enhance our capacity to store more and distribute better, thereby reducing the price due to shortage.

The procurement of food grains is another inefficient area. On one hand, the government raises Minimum Support Price (MSP) which is good as the farmers get their due. But on the other hand, this increases the cost of food articles to the end customer. One main reason is the number of entities in the supply chain.

The next thing the government needs to focus on subsidies. While subsidies are given by both the central and state government for electricity, fertilizers, seed there is a big question if it reaches the right group of people.

Urgent action from government:

- treat agriculture as a focus area

- improve irrigation & cold storage facilities

- remove inefficiencies in storage and PDS.

- relook the subsidies and ensure that it reaches the right people.

What we need now is a second green revolution and we need it urgently.

BUY GOLD

While market experts are of two views on buying gold, given the fact that it has gone of significantly in the recent past and there has been a sell-off over the last few weeks, this analyst feels gold is a good buy for an investment period of 1 to 3 years.

Analysis:
- Euro zone still not out of the woods with problems in Greece, Spain, Italy and Ireland. The eurozone is more or less supported by Germany and France and both these countries are etting stretched both financially and politically.- US dollar is getting weak against a lot of currencies including Euro, Canadian Dollar, Singapore Dollar, Australian Dollar. With huge internal debts, slowing economy, Presidential elections in about 1 year, the US government will find it very difficult to take tough measures to cut down their spend. This in turn will mean that their currency will further weaken.
- Globally, commodities are cooling off, which means that spending has slowed down. This in turn will mean an overall global economy slow down for atleast another 1 to 2 years.
- For the developing countries (China and India), GDP is growth rate is slowing down and inflation is on the rise.- India especially has a clear problems with inflation, despite RBI raising interests over the last 2 years and a good monsoon. This mainly due to the effect of India moving from a saving economy to a spending economy and the first impact will be on inflation in the initial years
- Clear non-governance and no clear policy decisions, due to which the slow down is not getting addressed.

Finally, Festive season starts in India starting Oct and all the way upto next April when the demand for gold will go up.

Technically speaking, gold has a resistance at ~ Rs 2750 (Kotak Gold ETF) and can break thi due to the above mentioned factors in the next couple of months. Good support level is available at 2500, then 2250, 2150 and finally at 2000. The 50 Day average is around Rs 2500 which is the current levels and if this holds for a week, then the prices will stabilize and move up from here. Also, Rs 2000 acts a good support level for over 1 year now. Buying gold, best form is ETF and can be done as SIP over the next few months.

Disclosure: This analyst has invested in Kotak Gold ETF.
ps: caveat emptor.