Coriander inflation in my garden

Being an economist is rum..I mean, you give all these predictions and analysis points on the Indian inflation story and everyone listens to you breathless, waiting for even more pessimistic forecasts and analysis points. Meeting inflation in the corporate corridors or classrooms is great fun. It gives me a sense of …empowerment and I feel so good analyzing it…but come back home and I meet it in my kitchen and the petrol pump and at the grocers’ and especially so in hubby’s eyes when I go shopping…and then suddenly, its not so empowering. In fact, quite the contrary. I feel positively diminished, at least my pocket does.

So, last month, I suddenly took it on myself to grow some vegetables. Now, we are both amateur gardeners and pride ourselves on a smallish garden with the regulars- roses, hibiscus, tulsi…but this time, I declared authoritatively, we’ll grow herbs. So, we started a smallish vegetable garden and for starters, I decided to plant coriander. Rs.20 a bunch, I thought furiously…its robbery! I mean, its not even mainstay for the Indian dinner, but you can’t even do without the damn thing. The dal and the sabzi look so very…forlorn, if you know what I mean..they almost look anaemic without the coriander. Add a dash of the greenery, and suddenly the most ominous looking preparations get smarter. Its almost like the MBA degree, I thought gleefully, it just helps you to look better. So, I got working on it and crushed the coriander seeds into two parts (just 2 parts, the experts had warned me) and I kept them in water for about 4 days and then, the day of the planting finally arrived. With great ado, I dug small little rows with my fingers in the clay and we liberally planted the seeds into the rows. My little one, who had crushed the seeds into either 2…million parts or not crushed them at all 4 days ago, was very excited about this new science activity. We got round planting the seeds and then spread some cocopit on top (just enough to cover but not so much that it gets buried, said the experts again), watered the clay and then…waited.

It was quite an interminable wait, this one. Everyday, with great gusto, I used to look at the pot, which calmly, showed absolutely ZERO signs of any which growth even after 5 days. We had started rudely calling each other “coriander” instead of lazy whilst bickering and my son went so far as to tell me that he was feeling “corianderish” about his homework. Raddish with anger, I told him that he had not turned corianderish; its just all this computer and mobile stuff turning him fenugeekish. Well, a week, and no signs of growth. On the seventh day, my cousin, who is the expert referred to earlier and who would be tough competition to Stephen Roach on doomsday predictions, told me with certainty “Oh, but amateurs should NEVER plant coriander. It never grows. You might as well stop watering it. I am sure your seeds were not right.” Faith, I told myself, courage. After all, if this project fails, I’ll have to buy it at “Rs.22 a bunch today…soooooo horrible”, as my next door friend informed me. And then there were other global repercussions. Failure of this science activity, my son informed me in a state of panic, would apparently cost him his reputation. The sixth grade prefect’s mom apparently grows a kilo of coriander every day. Such pressure! So what with him glowering at me as if I was personally responsible for the greenery failure, constant discouragement from my cousin, who by now was visiting us everyday just to deliver bad news and my husband, who I suspect was enjoying this whole thing, I was really in a state…and then, it….happened!

Day 9: I went for my cursory visit to the garden and suddenly, there was this only one, very tiny, so tiny that it was almost not visible, shoot! YES! Even as my son came capering out to check his renewed chances of being made prefect, I told him to call mama and inform him about this new arrival. My cousin told me promptly without any fuss that this is not coriander at all and that its impossible to grow it anywhere on earth. Oh, for heaven’s sake! I thought. And I prayed for it to be coriander. Prefect chances grew by the day and by day 14, I was sure we had coriander in our garden. It looked so pretty and so lush; it truly was a delight to see it grow like that. Day 30, it was ready to get plucked and even while I plucked it with a deep sense of happiness, I realized the anxiety farmers had about their crops and the monsoon failures.

The phone rang. It was my best friend and we got gossiping about this thing and that. “Really Manasi, what is the world coming to.  I bought coriander at Rs.25 a bunch. Its murder, I tell you”, she said with great gusto. Rs. 25 a bunch, I thought. I‘ll take that any day.




Can India achieve the coveted 5.6% growth rate?

Can we grow at 5.6%?

This, to my mind, is the million dollar, oops, sorry, the 2 trillion dollar question. A lot hangs off this, doesn’t it? I mean, if we grow right and strong, a lot of things set themselves into correction mode. If the growth rate of the Indian economy moves from the current 4.6% to a 5.6% (an increase of 100 bps), then we have a chance to increase employment and consumption, better the standard of living and take a true shot at reducing poverty further. It also means that the FM will be able to collect more tax revenues; the Government will hence leave the household savings alone so that the private sector can avail of them. As the liquidity flow towards the private sector betters, higher growth will become possible.

How can we increase growth? Well, one great way of doing it is to increase investments. Does India invest enough? Compared to other developing economies, we have a pretty good investment to GDP ratio that stands at about 33%. And we have an excellent domestic savings rate to boot, with the savings/ GDP ratio standing at around 30%. So the domestic savings of 30% and the current account deficit of around 3% afford us an investment rate of 33% of GDP. Now, if the investment/GDP ratio is 33% and the Incremental Capital Output Ratio (ICOR) is around 4, then the Harrod Domar model of growth suggests that the growth rate of the Indian economy could potentially be 33/4 i.e. approximately 8.25%. And we are delivering a growth rate that is half of this potential outcome. This also means that the actual investment is far lesser than what the savings imply it to be. Where are we lacking?

Identifying the growth lacunae:

The first part of this story is that the entire household savings, which are at 30% of GDP, are not effectively available to anyone for investments. Why? The one year FD rates in India for the past 4 years have been below the inflation rate faced by Indian households; that makes it extremely attractive for the households to channelize their savings into non-financial or physical products like gold or real-estate. Such physical savings accounted for about 53% of the total savings in 2001; in FY 2013, the share has gone up to 68%.  Till such a time that the FD rates show a healthy differential over and above the inflation rate, a large chunk of Indian savings will stay away from the private sector investors.

To channelize the household savings towards the financial sector requires the rates to increase, or the inflation to fall, or a much more stable and attractive financial intermediation process. None of these sound easy, right? Increase the deposit rates too much and the lending rates will increase accordingly; so the savings will be now ready for financial intermediation but no investment appetite will be left. So truly, the solution is not to tamper too much with interest rates, but rather focus on the inflation figures.

Why is the Indian inflation rate so very high? While demand increments have played a definite part, I think the more stronger and pertinent part is the supply shock. Now, to cure the supply shock, we are going to need big ticket, sustained and long term investments into critical infrastructure. For this, we need money. This implies that we have very less rope to give out subsidies. This Government not only has the political majority, but also the economic compulsion to deliver on the subsidies count. So, Modi Sarkar, please deliver on the subsidies. Communicate. Educate. Talk to the people about this. Coax them into it. Make them understand. Only a sustained reduction in the inflation rates will help the households to get their savings back into the deposits. And that will be a big boost to the investment capital that the country has.

The second part of the story obviously is the 3% current account deficit, which implies that there are foreign capital inflows to the tune of around 3% of GDP. However, these inflows, especially in the past 6 months, have been more of the portfolio types rather than the FDI and hence again, the actual investment rate suffers. Whether the increment in FDI limits from 26% to 49% in defense and insurance will actually give a boost to either sectors remains to be seen. Again here, the Modi Government needs to change the way the defence sector transactions are treated. To cajol investors into the country, the license requirements, monopsony of the Ministry of Defence, limits on defence exports etc. need to be liberalized.

Lastly, there is the issue of the ICOR being high in India, suggesting that there are governance issues due to which way too much capital is required to create some level of growth. Here, I think, is the key strength of the Modi Government. The Gujarat model was very successful in cutting down the bureaucracy, an act that needs to be repeated at the Center. A few moves are already looking good. The move to unify the power and coal ministry was simply wonderful. More such things are needed. Quick guidelines on PPP route of financing, urea reform, GST, DTC, PDS reform, crackdown on hoarders will help in streamlining procedures immensely. I don’t have data to prove any of this, but these are the moves that will change that stubborn ICOR to 3.

It’s unfortunate that data on ICOR is not available even at the national level very easily; the planning commission releases plan-wise ICOR data. But my feeling is that if the ICOR data were to be made available state-wise, Gujarat would show some of the lowest ICORs. And that is the secret to high investment and high growth trajectories. If the ICOR can be reduced, truly spectacular wale acche din aayenge!

On why inflation is low for June 2014 despite bad monsoons

Hiya Folks! Read in the Economic Times today (15/7/14) that happily, for the Modi Sarkar, the effect of the rainfall has not yet petered down into the prices of food and other commodities. WPI inflation, the article claims, is at a 4-month low of 5.43% and down from 6.01% in May. However, ET also suggests, rather ominously, that its a matter of time before it does enter the indices and hence it looks like a rate reduction in the 7th August credit policy announcement is unlikely. I agree. Inflation indices that seem benign today are the result of the RBI being consistently tough in keeping the rates high; a small slip, and we could well move into much more uncomfortable inflation figures, that would hurt the Aam Admi pretty badly.

But how long will it be before the indices start showing the effect of an exceptionally dry June? I thought that a quick look at the data would clear up matters significantly. The first place I went to was the Indian Meterorological Department website, where to my trauma, I found excellently maintained data sources on rainfall every month, every year, as per district, region, state….you name it and they have it. Trauma? You may well ask, but given my earlier brushes with badly maintained data sets at various Government levels, it has become something of a favourite past time to bash up Government departments for not maintaining proper data. So when my favourite punch bag suddenly became a Santa goodies bag, I was flummoxed and flustered, to say the least. But bravely, I surfed on and got my hands on data for average Indian rainfall for the past 10 years. Now, in what follows I give a very basic analysis of how I am viewing things. If one just takes the growth rate on rainfall over the last year and compares it to the y-o-y GDP growth rate, this is what one would get:

Rainfall and GDP

The X-axis is moving from 2001 to 2013. Now, while it is a MUCH better idea to look at rain deviations from the long term period average, I have done a level 1 analysis here and am just looking at y-o-y trends for a rough picture. You can immediately see that the rainfall performs very poorly in 2009, which indeed has been identified to be a pretty bad drought year for India in the recent past.

Now, its interesting to note that the GDP growth rate moves from around 8% in 2009 to 10% in 2010, despite the drought conditions. How, I ask myself, does this become possible? One of the answers obviously is that the agriculture sector contributes to less than a quarter of Indian GDP and so, any effect of the monsoons, on the growth rate could be pretty damp. So, while the agricultural GDP may have fallen, India still shows better growth on the basis of a service sector responding to a strong global recovery. This also perhaps points to the fact, that the bad monsoon spell in 2014 so far, may not have an immediate impact in terms of slowing down the GDP growth rate.

However, even though the effect of the monsoon on the GDP growth rates may have been damp in the 2009 episode, I believe that this effect will definitely show itself in terms of higher food prices and in terms of higher inflation in 2009 and 2010. I go back to the inflation statistics to confirm this. In what follows is an analysis of WPI because WPI being at a 4-month low was the trigger point for my thoughts today.

Interestingly, the WPI inflation for the year 2009 itself stands out in the crowd because it is so phenomenally low! Take a look at this:

WPI trends post 2009 drought

Of course, while the WPI is low, it undoubtedly shows a hike (pl note that WPI inflation figures are to be read as y-o-y) all through the rains and from October onwards moves into an alarmingly high slope category. I also see, albeit just on visual inspection, that the inflation effect persists throughout the next two years: The top moving inflation series are in 2010 and 2011. The persistence makes sense. A bad monsoon means that the ensuing kharif and the rabi seasons would underperform, supply would get affected and the prices would rise. In a traders’ market with alarmingly low levels of legal compliance on hoarding, there would be immediate incentive to hoard the non-perishables and the not-so-perishable cereals/ pulses/ vegetables, thereby driving up the prices. In the meanwhile, food inflation would also contribute highly to the retail inflation, which in turn would get reflected in the dearness allowances, thereby sparking off a wage-price spiral. The Government would be tempted to raise the wages paid under schemes such as NREGA, to make sure that the rural labourers, the beneficiaries of the scheme, always have enough money to purchase sufficient amount of food. This would drive up the farm sector wages, further increasing agricultural costs and further putting pressure on the already high food prices. These factors have been well-documented and are a part of the agriculture-food-inflation economics that is India.

Visiting these facts today is important because it helps us to sense where the rogue fundamentals affect the system. I have a feeling that this bad monsoon may not immediately take off on bad growth figures, but it will play sharply on inflation. So reduction in the rates in the August policy would be premature and indeed, dangerous. Whilst the monetary policy holds on to tighter reins, the Modi Sarkar would really need to crack the whip on hoarding. Unless we get some action in that sphere, there is no way of avoiding high food inflation in the future. The other thing the Government needs to do is control the urge to increase MSPs/ NREGA wages in anticipation of higher food prices. It is very difficult to understand whether high NREGA wages are the cause or effect of food inflation. There seems to be some level of bilateral causality between the 2 variables, and I would like NOT to see any immediate action in that sphere.

That’s about it from my end. Food is going to get expensive, folks…food for thought, anyone?

*A disclaimer before I end. These are quick reactions to the piece in ET this morning, not well-crunched research results.

**I also want to thank my student Shrabana Mukherjee from Symbiosis School of Economics, who helped me to put together WPI data quickly for this piece.




The mad econometrician at Mumbai airport

Of Statistics, Shakespeare and Superman

Hmmm, how do I fit this…a sine wave like movement on the ACF…is that spike on the PACF…so will it be an ARIMA (p, d, q)…Auto-Regressive or Moving Average? I was in the statistical trance promised by Messrs Box and Jenkins and pottering about nicely, even ecstatically in my econometric world when “Biiiiiiiiiiiiiiiiiiiiiiiijoy!!!!” A shriek so maddeningly intense and sugary split into my stochastic thoughts that Box’s ARIMA lay in tatters in a shattered box. Upset at my reverie and my train of thoughts broken, I looked around to the source of the outlier in the otherwise quietly buzzing airport and found myself staring at a young mother shrieking at her 1 year old so that she could take a pic…”no no nooooooooo maankey (Bengali confirmed with 95% confidence, said my uber cool statistical instinct) look this way betaaaaaaaaaaa (red and white bangles, data validation, 100% Bengali). Kii holo?” She asked looking back to another young woman who could only be her sister.

Both sisters were dressed identically in shorts (not that I have anything against them, but such logarithmic compressions are not always suitable on all kinds of data, you know) and ganjis. Now with Bijoy having left his indelible mark in the form of ummm….now how do I put it…concentrated level of fat depositions on his mom’s tummy, the ganji was looking a bit weird on her. But what was more maddening than the ganji was her rush to capture every moment of what I could only assume to be Bijoy’s first plane ride on the camera and whatsapp it to the world. An exception to the law of Diminishing Marginal Utility- that’s what’s whatsapp..the more you send stuff on it, even more do you want to send. However, the funniest part of this full drama was Bijoy’s father. The man had typical IT/Banking/ Consultancy professional looks. Now this professional refused to look daddy’s part- even for whatsapp….tch,tch, what is the world coming to. The consultants cannot even take off their bored expressions for a prize photo with Bijoy! The man continued to hold the mite stiffly, rather like holding a bouquet, with complete zero expression with the mother dancing around in a mad ecstasy of first flight in Papa’s arms- breaking news. Even as Papa refused to change expressions, I looked back to see where maasi had gone missing.

Maasi was just completing the paper work. While checking in, she was checking out as to which young men at the airport were checking her out. As she approached let-me-whatsapp-you-momma, the I-can’t-and-won’t-change-my-expression papa, if anything, became even more pan-faced. Two of this crowd is too much for him, I thought triumphantly, my mad mind searching for an explanation for this statistical deviation. Just then, “Biiiiiiiiiijjjooooooooooooooy” came in a shriek from yet one more quarter. Oh no, I thought with a sinking heart. A third sister? From the crowd, emerged, predictably a third ganji, though this was not a ganji…it was a sleeveless shirt on a much older woman who could only be Bijoy’s grand shriek-mother…Both the girls hurried to rush and hush their mother that such shrieking is a public disgrace. As grandma emerged more completely from the crowd, I saw that she too was carrying a mobile in camera mode, wearing a sleeveless shirt and …thank you God…full length jeans. This kind of a specimen that is 63, wears jeans and clicks photos faster than you can say whatsapp, has sunglasses perched on her hair, absolutely no clue about how weird she is looking and has a grandson named not Vivaan, or Ansh…but humble Vijay..was such an outlier that the computed value of these vital statistics was waaaaaay more than any critical Indian value- and the null of normality, as supported by Jarque and Bera, came crashing down around my ears.

If complete annihilation of my knowledge of statistics was not enough, my linguistic and grammatical tools were also to be tried and tested. “He is haangry???” asked grandmother taking me back to the moot question as to bhy…pardon me…why verbs were created in the first place. The verb normally comes after the subject in a statement “He is hungry” and is supposed to go to the first place for a question “Is he hungry?” But to use the statement as a question only by changing the tone “He is hungry???” is a classic that would have put most of Shakespeare to shame. End of the day, language is about communication, Wren and Martin be damned. By now, pan-face had donned a look of complete resignation with the three women descending on him and the mite with varied pitches and decibels of joy and clicks and movements.

The little one was dressed in a Superman’s dress. Even as he struggled and got away from Mr. Resignation and Mrs. Ecstasy, the hot maasi and the loud grandma, he gurgled and suddenly, very loudly, shrieked his own name “Biiiiiiiiiiiijooooooooy”! Oh, a logical, genetic and conditioned extension of the past. My job too was done. Auto-regressive, I decided.

Rains are here…finally

Well, its drizzling in Pune today, finally. I was beginning to forget what overcast skies actually look like. Of course, today’s drizzle is in no way enough. We are looking at making good a shortfall of nearly a month. The biggest issue in the rural areas is the health of the rain-fed farm sector and in water-starved urban areas, its about implementing water cuts so that the populace gets enough water for drinking and sanitation.

The economics of agriculture and urban planning apart, today, I was just happy to get a chance to use the wipers on the wind-screen!


Rail fare hikes stand justified

I liked the rail budget. There were a lot of expectations around the maiden Rail budget of Modi Sarkar. I liked the candid talk, the way the constraints were presented, the constant mention about making the Railways gen-next friendly, the simple representations of the financials. The Rail Budget spoke about the operations, the aesthetics and the financials in a very candid fashion, which is more than what one can say about the laa-di-laah Laaloo budgets or the moody Mamata ones.

The fact that one would have to do an ABC analysis and prioritize a few projects rather than create more projects that take you nowhere makes sense. This prioritization makes even more sense when you consider the operating ratio of the Railways i.e. the ratio of expenses to earnings. The operating ratio of the Railways stood at a healthy 75% in FY 64 and has deteriorated to 93.5% in 50 years. The writing is clear- our revenues have not kept pace with the increment in costs. This means that we will have to look aggressively at increasing our revenues, despite the Railways having a social, inclusive theme to it.

Where do the revenues come from? 70% of the rail revenues come from the freight traffic. Freight traffic on rails has been facing serious competition from the road carriers in the past 5 years, Its not that rail transport per kilometre is more expensive; however, when one adds logistics delays, booking issues, lack of point to point services, one can see why road transport becomes favoured by the industry. India also has some of the highest average freight revenue per tonne kilometre globally indicating that further increments in freight rates may be detrimental for revenue growth, especially in the current fiscal wherein a good growth momentum is yet to set in.

Passenger traffic contributes only 30% to rail revenues, not because the Railways don’t ferry enough passengers, but because the latter underpay since they stand cross-subsidized by the freight traffic. A look at the figures is telling. The average passenger fare to freight rate ratio for China stands at 1.2, for Malaysia at 0.8 and for India at a meagre 0.3. The Rail Minister underscored that the increment in rail fares was a compulsion and a correction that the Government had to undertake. If one looks at the increments in fares that have happened since FY07 till FY13, its astonishing to note that the average rate per passenger kilometre changed by only 1.3% in 6 years whereas the average rate per tonne kilometre changed by 3%. In FY14, there were some increments that the UPA Government enacted out of necessity that a 9.5% inflation rate created. The correction of 14% in passenger fares will have to be seen as a cumulative effect of the corrections not done by the UPA Government, even when the inflation levels were soaring from 2009 onwards.

The 14% hike hits the common man directly. It contributes directly to increased cost of living and increased inflation, for those people who use these services. So, what in the world happened to the “Ab acche din aayenge” model? It is important for us to realize that the pay-if-you-use model has a lot of advantages to it. Were this fare hike not implemented, it would have shown up as a loss, eventually adding to the fiscal burden, further leading to money creation and hence to inflation, for everybody across the board, for users and non-users alike. Its just not a great idea to ask the non-users of railways to pay an inflation tax to subsidize the users for their travel. An across-the board inflation hurts the public more since it feeds into the dearness allowances, setting off the wage price spiral that is truly difficult to control. So, while it looks like the 14% hike is bad news, we need to understand that it could be worse.

Benchmarking the fare hikes to the fuel prices also seems necessary, because it allows for an automatic correction tool. End of the day, its important for the consumer to understand that paying more is a part of reality. If we don’t correct specific prices as the days go by, we will have to factor in a generic price rise that will harm all of us more. Bitter medicines are an infinitely better deal than prolonged painful illnesses.