Tuesday, October 17, 2017


The general perception is that gold and diamond imports are guzzlers of precious foreign exchange. This impression is totally misplaced.  If import and export of these items of last six years is analyzed, then the trend that emerges is that there is significant “value addition” when gold as jewllery is exported and rough diamonds are shipped out as cut and polished diamonds. (Data is collated from Gems & Jewllery Export promotion Council (GJEPC), sponsored by Ministry of Commerce.)
In respect of composite sector  (chart 1)consisting of import of gold bars, silver, rough diamonds, pearls etc. there has been consistent value addition since 2012 rising to 34% in 2016 and around 23% in 2017. Likewise if gold bar imports are considered in isolation, there is a steep value addition since 2015 touching 81% and at 104% in 2016 (chart 2).   $4.15 billion of gold bar imports of 2015 have yielded about $8.55 billion of exports; it equals net exports of $4.37 billion. With surplus forex earning by the precious metal and precious stone sector, notion of depletion or pressure in FX reserves due to their imports is erroneous. Infact gold jewllery/ polished diamond exports etc. are more than FX neutral. It could also mean that Indians household may be using a major portion of recycled gold instead of relying upon fresh imports.
Total value addition by gold jewllery and diamonds, pearls, precious stones etc. is about $26 billion in last six tears or averaging about $4 billion per annum of FX earnings. This is the result of skilled craftsman ship and efficient trading practices of import and exports where price sensitivity is at its peak. Compared to that average annual export of $4 billion of Basmati rice is highly water and labor intensive including the use of fertilizers—that is also imported.
Any policy action to restrict imports of gold/rough diamonds will have parallel effect in pulling down exports. Indian exports of gold/diamonds are about 13% of national exports in 2017 or about $35 billion (see chart 3). Thus there is a case for incentivizing such imports for more exports.  Here is a suggestion worth considering for the policymakers.--
At a time when Indian exports are sluggish, why not gold/diamonds import be linked to overall Indian exports!!  Trade and industry are looking for incentive to export. Conceptually all exports may be rewarded with a freely tradeable scrip (named as “gold/diamond certificate of import”) of 10% of each Indian exports in US dollar denomination. With about $300 billion worth of India’s current export, 10% scrips would be about $30 billion. Since gold/diamond imports are worth$30-$40 billion, such an entitlement will let earn the exporters some market premium of 5-7%, depending upon import intensity of gold bars and rough diamonds.  Custom duty on gold imports will then have to be made nil within one year of notifying this facility.
Such a “gold/diamond certificate of import” could be issued to the exporter by the bank through which export documents have been negotiated and payment for realized. (Those who are not able to able to import gold/diamonds by using such certificate may pay 20% “penal” duty for clearing their consignment.) This duty free import scrip may be submitted to custom authorities at the time of clearing gold/diamond consignments.
This mechanism will be self- regulating—as much as –when Indian exports increase, the value/availability of these scrips will also rise but their premium will come down –facilitating less costly imports of gold and diamonds. The value addition in gold jewllery/polished diamond export is more than sufficient to absorb this 5%-7% premium, though currently re-export is available on zero duty.     
The proposal is not a new idea but that existed in 1997-98, when the DGFT used to auction “special import licenses” for gold import on the basis of maximum premium offered by the bidders.  Currently nominated agencies, including prominent banks and select trading houses are importing gold. These agencies too will have to acquire these import scrips from the market. Dollar denomination of the scrip is suggested to lock the value so that stronger or weaker rupee may not affect the intrinsic value of import.
Recently there have been controversies under India’s FTAs with S. Korea and Indonesia that provided duty free imports-which perhaps led to some of imports of gold being diverted through these countries. If gold/diamond imports are made on the basis this certificate and duty reduced to nil, such issues will automatically cease to exist.
Right now, with 10% import duty and 3% GST, there is an arbitrage between prices abroad and Indian market-- that provokes unofficial and illegal channels of imports. The above suggested scrip will minimize that arbitrage and such activities.  
At a times when jobs and business opportunities are reportedly on the decline—this tradeable scrip will create a new market of traders/brokers/commission agents and importers that would be atleast  worth $1.5 billion in revenue to the benefit of exporters.
Gold/diamonds trade is supportive to the national economy, and internationally too Indian skills& craftsmanship in jewllery and diamonds are well recognized. Based on the evidence of imports and exports of precious metals and precious stones, this trade deserves to be encouraged holistically.   

Friday, October 6, 2017


Conventionally, Indian exports statistics of agricultural items include all plantation crops, meat, poultry, marine and dairy products etc. An analysis is made on the basis of data available from 2010 to 2016 of Agri-exports by “excluding” Buffalo/Sheep/Goat /Processed meat, Poultry and Marine items that falls in a grey area of terminology of real Agri exports.  Reason-- products of animal flesh cannot be deemed “agricultural items” by any stretch of imagination. (Dairy products are not excluded). Feeding animals for slaughtering is a case of industrial production of buffalos/sheep/goat/chicken rather than any farm related activity.
Offsetting meat/marine products is vital to measure the genuine exports of agro products rather than to be merely content with illusion of higher exports by including these items. Segregated data gives a reality check than a false sense of comfort.
As per the official data, farm exports climbed up as from $ 18 billion in 2010 to$33 billion in 2016—up by 83%, with a peak of $42-$43 billion in 2013 and 2014. (See chart 1)  Exports of meat and marine items have risen from $3.5 billion to $9billion from 2010 to 2015/ 2016—higher by 160% with a high of $10.6 billion in 2015. This is consistent with the emerging global trend wherein dietary preferences are shifting away from cereals and grains to consumption of animal product. The effective or net increase in exports of plantations crops and their products from India appears to be negative or marginal.
Agri -exports has been cited at 12-13 % of “total national exports” in 2015-2016. But they are infact about 9 to 9.3% in last two years when exclusion of meat/marine items is made. (See chart 2)That shows reduction in real Agri exports by 3.3% to 3.5%. Exports of plantation crops in India’s “total export” were 8% in 2010 and 9% in 2016—which shows negligible sustainable growth in exports except for the small blip of 10%-11% in 2012 to 2014.
Trend of rising Agri imports and falling rate of Agri exports (w/o accounting for meat/marine shipments) will soon make India a net importer of Agri products from vantage position of net exporter of Agri in next few years. Imports are at $21.5 billion while exports are 23.8 billion in 2016—a spread of barely $2.3 billion-- from highest spread of $19.6 billion in 2013. With sharply ascending imports of edible oils, pulses and now, wheat and sugar as well, the spread of $2.3 billion is bound to collapse.
Usage of products derived out of animal husbandry also implies that we are promoting inefficient production especially for export too. Buffalo meat requires 25 times feed for “edible meat”; pork 10 times and chicken 5 times input for output as food.  Water consumption for 1 kg beef is 15400 liters versus 1 kg rice at 2500 liters. One kg of sheep meat too requires about 10400 liters of water. Generally Indian rice production and its exports is flagged for copious water consumption but meat production is 6 times more water intensive than rice.   In terms of energy, 3 calories of energy are needed to create 1 calorie of edible plant material, whereas grain-fed beef requires some 35 calories for every calorie of beef produced. 
Global dietary trends continue to move towards high meat content. In China between 1981 and 2004, the annual per capita grain consumption declined from 145kg to 78kg in the cities, while over the same period intake of meat products rose from 20kg to 29kg per year. There is no denying that there is an ample demand of meat etc. in overseas markets but it requires to be debated whether large crops should be consumed for fattening flesh of animals for exports in preference to  population at home.
As per a report of Institute of Mechanical Engineers London, “The challenge is that an increase in animal-based production will require greater land and resource requirement, as livestock farming demands extensive land use. One hectare of land can, for example, produce rice or potatoes for 19–22 people per annum. The same area will produce enough lamb or beef for only one or two people”.
Let this analysis be understood objectively without relating to notion of vegetarian versus non –vegetarianism. Idea is to submit facts so that exports of plantation crops be incentivised;  meat/marine/poultry products may be classified as another category; efficient methods of crop production with better yields be promoted keeping in view the rising potential demand of grains/pulses/ oilseeds by understanding the limitation of land area and availability of water.
When primordial pursuit of man has been to attain higher efficiency economically in all spheres through scientific and ethical means- whether in energy production, automobiles, computers, trains etc.—why matters of consumption patterns of what is fed to human beings  are not being linked to  precious resources conservations!! That appears strange.

Wednesday, September 20, 2017


If there is one notable development that needs to be acknowledged in commodity markets, it is the supremacy of Russia in global wheat trade. Russian wheat production has scaled up from 38 million tons (mt) to about 81mt in last five years—an increase of 113%. Productivity in terms of yield is up from 1.8t/ha to 3 t/ha—about 67% in the same period (See chart).
Russian productivity is even higher than that of Australia; ruble is a weaker currency further weakened  by US sanctions over Crimea; has limited storage silos space;  inadequate holding capacity with farmers; consumes annually about 40mts (about 50% of production)—all these factors contribute to lower prices in US dollar. MNCs like Glencore, Cargill and Olam have built silos and export terminals, take positions on wheat trade on break bulk cargos of 30-50k.Just as India is the largest player in rice internationally and any restrictions/ban/export duty will fire world values of rice, any of such actions by President Putin can ignite wheat markets.
In global wheat trade price discovery is made at CBOT for US SRW wheat and then those values are applied with certain premium and discounts for determining sale/purchase quotes of other origins (e.g Australia, EU, Canada, Black Sea etc). But this process is changing fast and that is --Black Sea wheat prices of Russia/Ukraine have now bearing on CBOT quotes.
Soviet Union was once dependent upon wheat supplies from USA and elsewhere. IN 2017-18 Russia, alone, will again surpass USA in wheat exports. It is expected to ship out 32mt in 2017-18 versus 27mts by USA as per International Grain Council –London. In 2015-16 also Russian exports exceeded USA by 5mt. (see chart)
Egypt –an annual importer of 11-12 mt of wheat- has been buying bulk of its purchases from Russia and against competition from other major origins. Most of the Middle East also seeks Russian cargos.  Indonesia buys most of its wheat from Australia due to logistical reasons but has switched to Russia for lower costs. FCI import of about 8 mt in 2006 to 2008 had a substantive component of Russian cereal.
Russian/Black sea wheat, also referred as red wheat, has four major varieties which include feed wheat (meant for poultry and livestock) and milling grain (for flour). Depending upon protein content and other parameters like Gluten (stretch ability) blending of feed wheat with milling wheat can reduce price of a cargo.
China by its efficient productivity in consumer goods has kept the lid on inflationary pressures worldwide. Russian grain too has traded within a limited range of $160-200 ex warehouse for acceptable quality Type 3 grain in last three years, thereby giving a tough competition to global traders including others in the Black Sea region. Though there may be specific quality issues with Russian wheat, but they do not justify much higher premium of other nations.
Indian flour millers blend imported wheat with local wheat for getting specified specifications of flour. Low priced imported wheat lowers wheat quotes and, wheat flour inflation. From India’s perspective surpluses of Russian wheat and its price around $190/ton landed/CIF, it costs about $234/ton or Rs 15000(10% duty paid plus expenses of Rs 1500/ton) which is lower than Indian local market prices of about Rs 16000-17000/ton or $250-$275/ton in Indian north zone (Deptt. of Consumer Affairs). Price in south zone of Indian wheat will be much higher.  Thus it prompts imports from Black Sea and Australia.  
Downward price pressure on Russian crop will continue in next three months and that is bound to exert corresponding bearish sentiment on Indian wheat. Import intensity can increase with another $10/ton fall in prices, making imported grain cheaper, lowering local values that will not be remunerative to Indian farmers.
Though some cargos earlier imported at $220 CIF/ton prices and old stocks stuck with importers may have slower lifting at a marginal loss, new contracts at $180-190CIF will make up the loss provided import duty is not hiked from the existing level of 10%. IGC expects India to import about 3 mt by March 2018 out of which 0.2 mt has arrived so far. Also higher duty will completely block any imports from Australia where production is down and prices averaging about $260 CIF.
Government also needs to beef up its stocks that bottomed to 8mt in April 2017. Fixation of high OMSS price of Rs 17900/ton is meant to ensure that FCI reserves get depleted to the minimum. Should import duty be fixed at 20-25%, it will discourage imports that would create demand pull from domestic market, including FCI.
With August WPI inflation rearing its head again to 3.2% in August 2017 from low of 1.9% in July 2017, can we afford not to give priority to consumer at the cost of farmer. That is a very challenging call. Russian bearish wheat values notwithstanding, Government has to do tough balancing act on wheat inflation and between farmers and consumers.  

Wednesday, September 6, 2017


 On 29th August 2017, Government impliedly confirmed tightness in sugar stocks by limiting inventories of mills by end of September and October2017 with specified percentage as 21% and 8% of total sweetener available with them in sugar season 2016-17. Maharashtra mills were requested to commence early production, immediately after Diwali—but they have expressed their inability due to absence of required labour strength and low recovery issues. Now UP millers are promising to start mills promptly after Diwali. Industry has further suggested that transport subsidy be given to mills in UP and Maharashtra for despatches to Karnataka and Tamilnadu to obviate imports.  All this activity is meant to ensure that sugar prices in the local markets do not flare up beyond existing wholesale price of Rs40/kg vs same prices of Rs 26/kg in 2015. (See chart). Retail values are Rs43-45/kg vs Rs28-29/kg in 2015
 Government has been considering additional imports of sugar especially for the mills in South to contain demand pressures after import of first tranche of 0.5 million tons (mt) of raw sugar of Apr-June 2017.  The Indian Express article of Mr. Harish Damodaran (24th August 2017) stated that “Cane-starved southern mills want duty-free raw sugar imports, which the industry particularly in UP is bound to resist”. He called this a north-south divide. Duty hike in July2017 from 40% to 50% was done to completely rule out possibility cheaper imports (that would cost Rs 27-28 pkg without duty ex- mill). Thus local prices have ruled firmer.
Irrespective of North-South divide, let this issue be considered upon data available on record. Issues are—First, whether additional imports are justified and secondly, what has been the price behaviour of sugar in last two years.
Are the carryover stocks of 4 mt sufficient when next year anticipated output is 25mt and consumption is also about 24-25mt? Thumb rule is that country should have minimum three months stocks of annual consumption. If India’s annual usage is 24-25mt —we need atleast 6 mt carry in or import of (6-4) =2 mt next year for ensuring three months stocks.
Other empirical formula is “stock to use” ratio to be higher than 20%, say atleast 25%, if prices are required to be moderated. Currently carry in stock/use ratio is 4/25x100=16% that will make values more bullish.  If sugar prices are required to be tapered down somewhat, 24% stock/use ratio can be attained by 6mt carry in (or 6/25x100). In both cases logical answer is same-- import of 2 mts next year. Stock to use ratio have been 32% to 42% in previous years (see chart). Psychologically lower inventories give ideas of stockpiling and speculation for better returns.
For example FCI is using the similar matrix while determining wheat stocks. As of 1st April, the beginning of marketing year, minimum inventory level is fixed at 7.5 mt and usage in PDS is 30 mt-that gives stock to use ratio of 25%.
Policy profiles of last two years have aided higher prices of sugar that have helped both farmers and mills which indeed is welcome. If imports are completely blocked by high duty, sugar values would ascend further to the detriment of consumer.
 If the matter is assessed on the basis of sugar inflation of 39% in 2016-17 and 8.44% as of July in financial year 2017-18(Economic Advisor report date 14th Aug2017) then there is a case of relaxing terms of import for 2 million tons of sugar to moderate prices.
Basis of the current retail prices around Rs 43-45/kg is the FRP of sugarcane of Rs 230/qtl of 2016-17. When FRP is Rs 255/qtl in SS2017-18, which is 11% higher and given the fact other matrixes remain unaltered, sugar retail values may also elevate pro-rata.
The plea of the stakeholders that Indian sugar has to be much higher than international prices because of FRP/SAP etc. is logical up to a point  but not under current domestic scenario. Continued choking of imports is bound to inject inefficiency in the industry because profits are secured under closed market mechanism.
It is well admitted that cost of production of sugarcane in India is higher by about 30% compared to other competing origins--and this % can be rechecked. If true, than duty protection beyond this point may be reviewed. This will ensure that principle of comparative advantage is not abandoned or deserted which is fundamental to national and international trade.
Right now international prices are supportive and thus imports with viable duty can soften domestic values. Government needs to take a call on moderation of sugar prices, act in the interest of all stake holders and avoid sugar inflation to double digit level, when wholesale national inflation is just 1.8%. Facilitating minimum imports of 2mt is the sole prerogative of the authorities.  


Thursday, August 31, 2017


 A large volume of basmati rice (hereinafter referred as rice) shipments to Iran is exposed to non-payment/delayed remittance/outright loss.  There are whispers in market of about 125000 tons of rice—value approx. Rs 875 crores, shipped out a few months back, mostly in 6000 containers, is awaiting payments from  Iranian buyers.   
Market players, who are small and medium size entities, contracted rice with Iranian purchasers at @ Rs 65-70000 pmt (or equivalent USD $1015-$1100 CIF)— average value about 25% higher than 2016-17 (see chart).
Reportedly Iranian rice market crashed and buyers have reneged from contracted price. But after protracted negotiations such cargos are being accepted at a discounted value of around Rs44-50000 pmt—which effectively means price cut of about 30% or an outright loss of Rs260 crores—while balance 70% is offered on deferred basis against future purchases by enhancing their invoiced values –as per mutual convenience.  Such a settlement may have variations depending upon understanding between the parties.
Result of non -payment or such a loss means that payments of paddy to farmers could be delayed while suppliers of PP bags, transporters and handling agents at the port may also remain unpaid. Since exporters generally avail pre-shipment credit from banks—ultimately banks are exposed to risk of non-payment, adding to the pile of NPAs.
Iran has a regular requirement of Indian Pusa 1121 (Par boiled) basmati rice –varying between 0.7million tons (mt) to 1 mt annually- depending upon their domestic output. Value wise Indian shipment to Iran touched$ 1.8 billion in FY14-but down to$0.57 in FY17. India ships out about 4mt of such rice in world markets annually without any serious payment problems.
 It is not the first time that shippers face with such issues of delayed/non-payment from Iran. There have been defaults/short payments in past as well. This phenomenon has frequent re-occurrence wherein sellers either suffer total loss or loss of profit.  Even soybean meal cargos in the past faced similar fate. It is immaterial whether buyer is a private party or any govt. entity of Iran.
The distinctive feature of this trend is that the same Iranian buyer fronts new companies as purchasers, while Indian counterparties conclude rice contracts at seemingly advantageous prices. Once shipment is made-- shipping documents are forwarded usually on DP (Documents to be delivered to buyer by the bank against payment) or other terms, but seldom against LC.  
Iranian buyers dither in making payments through banking channels; shipping documents are allowed to stagnate in Iranian banks or are declared deficient while rice is not lifted from destined port. With extended stalemate on non-payment and fear of cargo going bad in quality, sellers rush to Iran to settle the matter, resulting into forced discounting or settlement at arbitrary terms by Indian sellers.
At a time when government is focusing its concerns on farmers, it is important that such an issue may be resolved once for all. APEDA is the Governments’ controlling body for export of basmati rice. Allowing open and free exports of rice to Iran may be reviewed and such exports need to be secured with suitable restrictions.  Put simply—this could be enforced through “canalized payment mechanism” via an authorized official agency e.g. APEDA.
 Procedural format could be –Exporter/Seller may sign contract with a buyer in Iran with stipulation that 100% advance payment to be made to APEDA within 7-10 days of contract; date of receipt of payment by APEDA to be effective date of contract.  APEDA will notify this date to both seller and buyer; custom may clear cargo offered by seller for shipment after receipt of written advice from APEDA of payment having been received from Iran; buyer can nominate its inspection agency and load port inspection to be deemed final. APEDA should effect payment to SELLER after receipt of compliant shipping documents—as agreed in contract and issue a “no objection certificate” to bank of seller so that foreign exchange earnings accrue to the seller/shipper.
In case seller defaults in making shipment, APEDA should remit funds back to buyer at the cost of seller, including any difference in the rate of exchange and it shall not be liable for any quality/quantity/delayed shipment, claims whatsoever. APEDA/DGFT will also announce list buyers and their brand names of rice in Iran, who have earlier reneged from commitments and maintain an abeyance list for them.   Government can also nominate another trading PSU for the said purpose if APEDA is not willing to undertake this commercial activity. Such a payment security system may be tried for atleast two years and depending upon its efficacy, can be reviewed thereafter.
Exports without receiving full payments retard economic activity. WHEN a suitable security mechanism is introduced, fake importers are filtered out; buyers with respectable credentials and financial capabilities will trade with Indian counter parties; transactions are considered clean and above board; probability of disputes will diminish; exports will be truly rewarding with reasonable profits.

Friday, August 25, 2017


To upgrade performance of three PSUs—MMTC, STC, PEC-- Government is reportedly considering their restructuring and future role, with aid of a consulting firm.   Similar attempts were made earlier too in 2002-03, yet status quo was maintained. In 1989-1990, these three companies were put under umbrella of an outfit-- BBIL—Bharat Business International Limited—to prevent cross competition. Under this dispensation, Chairman BBIL reported to Ministry of Commerce. Heads of three PSUs were responsible to Chairman BBIL. BBIL arrangement was discontinued in less than two years as it created dual centers of responsibility-- as to who will be accountable for the performance of PSU-- Chairman of the PSU or BBIL’s chief!!
STC, MMTC, PEC established respectively in 1956, 1963 and 1971, acted as canalizing agencies to cater needs of socialist policy regime in India that lasted till 1990. DGFT (Director General of Foreign Trade) earlier named as CCIE-Chief Controller of Imports and Exports, issued licenses for import/export of canalized items to three companies as per the quota or trade plan provisions of East European countries. Their primary task was to import from GCA—General Currency Area or RPA-- Rupee payment Area—against such licenses, and then to distribute imported items to actual users as per directions of a specified Ministry.
Canalization meant monopoly of a particular business and therefore PSUs were not exposed to any competition.  They were virtually government departments dependent upon work assigned by different ministries and earned about 1-2% service charge.
When Soviet Union ceased to exist around 1990, Eastern European trade was disrupted. Simultaneously Indian economy was liberalized. These three companies had to survive in open market environment. Distinction in commodities to be dealt amongst them disappeared. MMTC and PEC started business in Agro commodities which was forte of STC. Similarly STC entered business of fertilizers which was handled by MMTC.  Likewise import of Bullion (gold/silver) and coal, earlier done only by MMTC was also undertaken by STC and PEC.  Export of engineering and allied items under the aegis of PEC was also picked by other too. Canalized export of railway rolling stock through PEC ended. MMTC diversified in to six or more joint ventures and has been able to create a niche in mineral exports and brand name in bullion business.
Total export of agro/minerals/other commodities of three PSUs in three years FY 2014,2015, 2016 is Rs 14935 crores while bullion imports are Rs.50671 crores. Overall business is import intensive while efforts are made to generate export with  assistance of other private or public companies, called “associates”.
 Since in-house expertise in commodities is not comparable to what market demands, PSUs rely upon costings and technical parameters provided by associates, especially for export.
Associates seek financial help—called pre-shipment credit from these PSUs—for execution of export business and “letter of credit facility” (LC) for import business against 10-20% margin money. PSUs from mid 1990s were actively acting like NBFCs (Non- Banking Financial Companies). Associates indemnify PSUs against any risk/loss. With zero risk to PSU on paper, service charges are minimal--not more than 1-2%. Experience reveals that in the process of de-risking, these very associates become the risk by creating counter liabilities for PSUs.  Either due to failure/mismanagement/hyper-speculation of associates or market volatility, businesses/exports/imports financed by PSUs resulted in partial or full defaults especially after economic meltdown of 2008.
Just as NPAs of the PSU banks have created problem of twin balance sheet, likewise such defaults have substantively eroded profits and net worth of MMTC, STC, and PEC.
In last 15years, PSUs are frequently doing “buy and sell” operations of export or import as an interventionist business for the government. For example: export of wheat/Rice for FCI; import/distribution of pulses for Department of Consumer Affairs. Any loss incurred on such imports/exports is to Government’s account—thus 100% de-risked.
 Official guidelines mandate that Buying/selling be done through tendering—which is time consuming and imperfect too. Such tenders inflate international prices. Chinese do such trades quietly. A bidder with weak credentials can quote attractive price but may renege from the contract.
 Trading involves cultivating buyers or sellers in India or abroad, taking logical market risk, hedging in future markets to mitigate risk, positioning for purchase or sale by going long or short. In absence of these activities, it will be erroneous to call them “trading” enterprises.
All businesses entail profit and loss. But in a governmental set up loss is an unpardonable sin. Profit is shared by all; loss is meant to punish a few who handled the deal. Officials saddled with such a rule book of fear cannot do trading. If ethos of business is not geared for trading, then merging or any other permutation may not improve performance of any newer entity.
Ratio of export to turnover is dismal currently (See chart). Imports, especially gold/silver, have much higher percentage in turnover—upside being 76% in STC in 2013-14.  Bullion is sold at nominal margin but has a very high risk probability.  The continuation of bullion imports through PSUs can be reviewed though MMTC is a dominant national player. Issue being whether bullion imports can be privatized to curtail it.
Speed of communication has jumped in last decade, where real time information is available to all and sundry on various commodity exchanges and on Google. What is “extra input” that PSUs can provide these days.  With financial muscle dwindling— why would a private party engage with a PSU?
RESURRECTION of these PSUs will be rewarding if they are empowered to “trade” in real sense, allowed to take reasoned risk, develop competence in select commodities, demonstrate significant export performance, reduce dependency on associates/private parties and Government gifted business, given freedom to trade with or without tender depending upon circumstances and offer something “extra” to counter parties.  Restructuring, though a laudable idea, but devoid of above element may not be meaningful.

Wednesday, August 16, 2017



A broad analysis of the sugar market from 2009 onwards till July 2017 reveals that mega trend of the sugar prices has remained bullish.  
“Retail” sugar prices ascended from Rs 29/kg in 2009 to Rs 32-35/kg in 2014—higher by 20%. In the recent past, sugar climbed up from Rs 31/kg in 2015 to Rs 39/kg in 2016 –an uptick of 24% and then to Rs 43/kg in 2017, another upside of 10 %. (Data -Price Monitoring Cell, Deptt of Consumer Affairs).   Sugar is retailed at Rs50/kg in Srinagar.
 On pan India basis sweetener’s price climbed north by 34% in last two years. This is when international market is down by about 40% in a year –from 22c/lb to 13.50 c/lb (raw values). (See chart). If import is made now, refined sugar will cost Rs 27/kg without any duty. After provisioning for margin of whole sale and retail, imported sugar may not cost more than Rs32/kg to consumer at zero duty.  India is thus exposed to a counter reality where sugar is sold at Rs42-43/kg when Sugar cane cost is Rs230/qtl.( According to CACP net return on sugarcane is highest at 52% on all India basis with crop duration of 12months.)
Press  release issued by GOI on 14th July 2017 states that “The annual rate of inflation, based on monthly “wholesale” price index (WPI), stood at 0.90% (provisional) for the month of June, 2017 (over June,2016) as compared to 2.17% (provisional) for the previous month”. Thus   whole sale inflation in India is less than 1%. But sugar has bucked the trend with WPI as 30% for 2016-17 and 11% for 2017-18. Retail inflation (mentioned above)and wholesale inflation are thus well synchronised!!!
Sensing the current scenario, stocks/shares of sugar mills are well supported. Most of the major mills shares have crossed 50% upside and some others have breached 140% rise in a year (see Chart) , indicating super profits. Mills in UP have done exceptionally well as compared to those in West and South of India. This is good time for the mills to have an in house stabilization fund to act as buffer for adverse market conditions.
In 2009-14, whenever retail values exceeded Rs40/kg, counter measures were initiated to drag down price to Rs 35/kg or so. Recently too Government initiated three step intervention to manage sugar prices –first by authorizing quota of duty free import of 0.5 million tons (mt) between April –June 2017. Second, in early July2017 it hiked import duty from 40% to 50% to keep prices firmer and stable, by preventing cheap imports. This second step is in contradiction to the first step of allowing 0.5mt imports to soften local prices.
Now in August2017, the same Ministry is reportedly contemplating third step of allowing another import tranche of about 0.25-0.3mt (originally thought to be of 0.5 mt). The third step negates the action of raising the duty done in the second step.
 Thus authorities lack clarity on policy—whether prices should remain firm or whether they are to be pulled down. Net result of this flip flop and pull-push policies is that sugar prices are bound to remain in the region of Rs43-45/kg at retail level at major centers Delhi, Mumbai, Kolkata, Chennai, Guwahati  (see chart)
During festive season of Sep-October 2017, demand pressure will ensure that sugar touches a new high. Sugar balance sheet indicates opening stock of 4 mt as on 1st October 2017—which is tight in any case. Had Government desisted from hiking duty to 50% in July 2017, some imports with lower global prices would have landed to keep local values in check.  
Operational procedure for registering imports via DGFT and subsequently ensuring timely shipments is very challenging.  Raw sugar imports from Brazil—if allowed under Advance Licensing Scheme cannot land at Indian ports before October 2017. Refined sugar shipments from Thailand appear to be the only possibility provided total tonnage and conditions of imports including custom duty if any is notified yesterday.
Sugar availability in North-East and South of India is a cause of concern and any shortage on immediate basis has to be made good through UP millers. Next year too, unless imports of 1 mt are made—we may see even higher sugar prices-may be Rs 50/kg, from existing Rs 44/45 pkg in the major Indian cities.
It will be thus expedient to affect more imports immediately to restrain further spike in prices. Sugar prices above Rs 36-37/kg give super profitability to Indian mills. Time has come to protect the consumer and somehow narrow the gap between rate of sugar inflation and general inflation which is less than 1%.

Wednesday, August 9, 2017


Bangladesh is experiencing severe scarcity of rice this year. Government of Bangladesh (GOB) initially determined “import demand” of 1.2 million tons (mt) of rice which later escalated to 1.5mt due to crop losses, caused by heavy floods in the country.  75% requirement of Bangladesh is of parboiled (PB) rice while balance 25% is of white rice (WR).
After 2011, it is the first time in May 2017 that GOB is seeking supplies from Vietnam, Thailand and Cambodia on G to G (government to government) basis by dispatching official delegations and simultaneously issuing import tenders of 50000 mt each.  Five tenders have so far been opened. No serious attempt appears to have been made by GOB with Indian Government to cover their requirements from India on G to G basis. Some shipments of Indian rice- about 1.5 lakh mt - have been made through land/sea routes by private trade. Meanwhile rice prices in Dacca—have risen from 28taka/kg to 45 taka/kg—higher by 61% in last three months. (See chart)
India is, not only, the world’s largest exporter of rice of about 11-12 mt annually (both basmati and non-basmati) it also enjoys supremacy in global PB rice trade which is the major demand component of Bangladesh. Logistically too India is a neighboring country; much closer than Vietnam, Thailand and Cambodia; cargo can reach same day to Bangladesh via land route or less than 3-4 days through sea. India can thus offer prices on delivered (CIF) basis which other bidders may not be able to match for same quality. It seems that GOB has not done serious recce and thus they are contracting rice on customized and elevated prices, rather than market prices, under G to G deal done so far.   
Graphic below indicates that G to G deal with Vietnam (annual rice export 5-6 mt) concluded in May 2017 of 0.2mt for 5% broken PB rice is priced at $470/t CIF which is much higher than the PB rice sourced by GOB against their 1st tender of May 2017 at $427.85 /t CIF— cheaper by about $43/t.  It is well known that Vietnam is an inefficient producer of PB rice of limited scales.
 Likewise 50000 t, 15% brokens WR contracted at $430/t CIF from Vietnam under the official deal is higher by $23/t or $406.48/t CIF. G to G deal is expensive—while tendered supplies are substantially cheaper.  Has Vietnam been able to make deliveries faster than those awarded against tenders is unclear. Five tenders amply reveal that PB rice for Bangladesh ranges around $ 420-$440/t CIF.
GOB also had extensive negotiations with Thai counterparts twice but no conclusion could be arrived at.  According to trade sources, Thais want to do business on FOB basis –that is-- Thai suppliers do not want to undertake obligations of hiring vessels and for being held liable for claims of quality and quantity at discharge port. GOB perhaps cannot deviate from the established procedure of CIF contracting and thus discussions remained inconclusive. Thais too indicated exorbitant values-- even higher than Vietnam.
Another MOU is reportedly signed by GOB with Cambodia (around end July-early August2017) to import one million tons rice within five years. Pricing of rice, if any, is not in public domain.  Long term understanding in commodity trade seldom materializes.  Cambodia’s official export is about 0.5 mt, while balance 0.6mt is cross border unofficial trade with Vietnam and Thailand.  Cambodia is not adept in shipping break bulk cargos and makes shipments through containers. It will be na├»ve to seek 0.2 mt rice in a year from Cambodia on break bulk basis
It is true that while GOB approached GOI in the past (during UPA rule) to augment their supplies through FCI but FCI adopted an inflexible stance of delivering rice on as is where is basis and that too at Indian ports only. This perhaps discouraged GOB from taking any proactive approach for Indian rice under G to G business.  Also FCI’s rice export through PSUs is not feasible as this entails additional operations like re-bagging, printing on bags, cleaning, up- grading (from 15% brokens to 5% for PB rice and to 15% from 25% for WR), transit losses etc. which PSUs cannot undertake. 
The only way a commercial transaction through PSUs can be structured is by having private partnership with rice millers/traders who have demonstrated past performance of undertaking exports in past 3-4 years. The PSU too should have exported rice commercially. GOB should be able to approach through diplomatic channels for such a deal through Indian PSUs.  Market players indicate that some discussions of GOB with Indian PSUs have taken place but then abandoned.
It is also feasible that if private trade from India is willing to match tendered price in the current bidding then such a bidder could also be considered for additional 50000mt or more.
It is not sufficient to have paper contracts or low/high prices but such contracts and prices should be able to translate into physical deliveries of rice for the people of Bangladesh. Rice prices in India are likely to soften in next 60days when new paddy arrives. Estimates of Indian rice production are 108-110mt. GOB may ponder if Indian grain/agencies can meet their requirements as it is doing for 1.25 billion population of this subcontinent and other countries of Asia, Africa, Europe and USA. 



Thursday, August 3, 2017


Three agro-commodities namely— edible oils, sugar and wheat-- are engaging immediate attention of the government with respect to custom/import duties. Reasons-- their prices abroad are much lower than in India. Domestic production of edible oil by oilseed crushing / refining units and sugar by sugar mills will stand to lose if duty free import is permitted or insufficient duty is applied while farmers will suffer if duty free import of wheat is authorized. (Why prices abroad are lower and higher in India, is not the narrative of this article)
Thus government provides stakeholders (including farmers) protection by making imports expensive.  Current duty on crude/refined oil varies 7.5% to 20%; sugar is 50%; wheat import at 10%. “Import demand” for edible oil varies between 65%-70% (see chart) of annual consumption, imported sugar requirement is about 2% of local production this year and wheat import is about 4-6% of domestic output. 
At the same time, government is obliged to shield consumers by discouraging inefficient production and processing.

Edible oil industry has represented that import duty may be increased to 20% on crude oil-  specially crude palm oil(CPO)-(from current 7.5%) and 35% on refined oil ( from current max 20%)  to support crush parity so that local prices of oils may rise while oil meal exports become viable. Prices of palm and soy oil are interlinked or to say the spread between the two has a relationship –that is if CPO values go up domestically or abroad, a definitive upswing takes place in soy oil and others soft oils as well. 
 A chart of declining trend in the local crude palm oil prices in rupees/10kg is show cased, which implies that realization of oil seed farmers could drift down.  Currently oilseeds prices fetch 10-15% below MSP for soybean, rapeseed and ground nut while last year market prices were higher by 20-25% than MSP.
Industry also espouses case of farmers for future growth of oilseed production. However when there is 65%-70% “import dependency” on edible oil, then a very large section of consumers, including farmers, are exposed to oil inflation with elevated duty. Authorities will have to rationalize whether hike in duty will be justified so far as consumers are concerned.
About 2 million tons of oil is transiting either at ports/custom bonding or in the pipeline.  It will be bonanza for those who are positioned for these stocks. But that is how market operates.

Government raised duty on sugar from 40 to 50% on 9th July 2017 to isolate local prices from possibility of cheaper imports. Domestic prices naturally soared. But around third week of July Government has written to industry as to why prices of sugar have flared up!!  When the raison d'etre of hiking duty was to keep local prices firmer, then officialdom needs introspection of their own actions.  Moreover August/September period is tail end of sugar season and prices shall spike anyway. 
Range of the duty varies from 0% to 50% as pictured below. In last 6 years, duty is modified 6 times!!  Incorrigibility/ sensitivity of sugar market is such that, in April 2017 “duty free” import of 0.5 mts of sugar was authorized, but in July2017  duty was enhanced from “40% to 50% to curb imports”.

Accompanying graphic displays flip-flop on wheat duty. In a span of less than three years, duty is notified seven times. It demonstrates predicament of policymakers in deciding quantum of duty and applicability of its duration. Importers of wheat remain nervous of any abrupt change in duty structure.  With rising demand wheat import is likely to be a long term proposition.

Above illustrations indicate that duty determination is a very challenging exercise. Market volatility and pressure groups can create arbitrariness in fixing the percentage of import duty and the duration of applicability.

At a time when PSD(production supply and demand) data, duties/tariffs and price movements are known internationally and nationally, Government may create an algorithmic application (ALGO) that can give transparent guidance-- to Government and the industry-- to trigger duty changes, up or down,—so that objectivity is maintained.

ALGO programming is wide spread in commodity and other stock exchanges.  ALGO can perform calculationsdata processing and automated reasoning tasks including decidability through computers at electronic speed based on input and output requirements. Why not apply ALGO for import/export duties also? Any well-known IT company can come up with computational process—if authorities take a call.

International and domestic prices can be tracked through commodity exchanges while each price tick signifies mutations in supply/demand including weather related issues. Government can predefine its target of high and low prices in domestic market or align them with MSP to regulate imports by duty or prohibition of imports by analyzing overseas prices through speed of ALGO. Each commodity will have well configured ALGO and that will remain in public domain. Inputs and outputs of such an ALGO would be available on real time basis to all and sundry on the website.

Lobbying by association or groups will then be minimal. Even farmers will have satisfaction of rational decision making process.  Though no system may be perfect but algorithmic guidance will have less imperfections.  Of course government may have final word on percentage of duty to be levied but then basis of duty determination/ any deviations thereof or discretions applied to the guidance of ALGO, will be known to one and all.