Will the Farmer’s Market Quell Food Inflation Worries?   Jul 15, 2016

July 15, 2015
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Something very unusual happened in Maharashtra over the last few days. The Agricultural Produce Market Committee (APMC) licensed traders and commission agents are feeling the heat of the State Government’s action. Moreover, farmers have pushed them on the back foot. Usually, traders and commission agents dictate the terms of trade. Farmers do not have the gall to bargain with them. The cartel of APMC licensed traders’ buy the produce from farmers at lower prices and earn huge profits by inflating the costs as high as 100%. Such cartels have been the real culprits of inordinately high fruits and vegetable prices. You probably have been wondering till now why even a bumper crop of a particular vegetable fails to bring down its price in the retail markets. The credit goes to APMC traders and commission agents. The secret of their success in that business has now become an open secret. The Government is now contemplating to block this open network permanently.

The Maharashtra Government recently issued an ordinance to amend the Agricultural Produce Market Committee Act, 1963 to end the monopoly of APMC licensed traders. Fruits and vegetables are not controlled by APMC now. Any farmer can go sell directly to the consumer at any retail market. Protesting this move, the APMC traders had observed a strike which they called off later. This strike was an example of how even the strongest cartel can be brought to its knees by introducing great reforms.

As a result of this strike, fruits and vegetables didn’t reach the retail markets. There are over 300 APMC markets in Maharashtra. So you can imagine the impact of the strike on the retail prices. Demand-supply mismatch pushed prices of already expensive fruits and vegetables through the roof. But you need not worry much. Farmers are now ready to reach you directly with their fresh farm produce. The state Government has granted direct licenses to various entities and some people to set up open markets. Once these licensees identify the sites to set up shops, vegetables, and fruits might become cheaper.

Having said this, eliminating the APMC Act completely remains a daunting task for the Maharashtra Government. Nonetheless, you can finally breathe a sigh of relief now. Breaking the monopoly of greedy traders has been the first step towards quelling the high inflation in fruits and vegetables.

Just a thought on an entirely different subject
If you have been a mutual fund investor, you might have got the same satisfaction that farmers and buyers are getting now, when the SEBI had scrapped the entry loads and had allowed mutual funds to launch direct plans with differential pricing.
Trade unions backed by various political outfits are likely to protest against a decision of labour ministry that is likely to take effect from the first week of July. Finance ministry has permitted the Employees’ Provident Fund Organisation (EPFO) to invest up to 15% of EPF contributions in equity markets. Following this, the EPFO had invested 5% of its funds in stock markets during the Financial Year (FY) 2015-16. This translated to about Rs 6,000 crore. This fiscal, the EPFO is likely to step up investments and put more than Rs 12,000 crore in Indian equities, thereby raising the equity exposure to say 7%-10% of its corpus.

Backing the move labour minister Mr Bandaru Dattatreya, expressed in a press conference that, “In the changing economic scenario, ultimately we will have to take a decision which is in the interest of workers.” However, trade unions are opposing the decision of the Labour ministry, pointing at the fact that the Finance ministry doesn’t provide any guarantee of principal and subscribers will have to bear the risk for the equity portion of investments.

Shall EPFO avoid incremental investments in equity?
Equity investments are primarily for the long term. And, it’s a fact that equity as an asset class has a potential to outperform fixed income assets over the long term. As the EPFO takes on exposure to equities through Exchange Traded Funds (ETFs), it is unlikely that it will take excessive risks. Over the long term, equity assets help us generate superior inflation-adjusted returns and fixed income assets are more often exposed to generating inflation-inefficient returns.

PersonalFN is of the view that, instead of opposing the decision of the Labour ministry blindly and provoking the organised workers, trade unions should try to create awareness about the benefits of investing in equities among them. Considering the socio-economic structure of India, the Government should give a choice to labours to participate in equity investments. If the labour ministry goes ahead with its decision without taking labours in confidence, the decision that appears appropriate at present may turn ugly.

PersonalFN also believes, you shouldn’t depend only on EPF money for building your retirement savings. You should invest as per your personalised asset allocation and that too at regular intervals.

The RBI and Government have mutually agreed to work towards achieving the target of 5.0% on retail inflation by March 2016. Going by the inflation numbers for the first 3 months of the Financial Year (FY) 2016-17; it looks like the Government and RBI may struggle to achieve the target. Retail inflation, measured by the movement of Consumer Price Index (CPI) has spiked to 5.77% to touch a 22-month high. At 7.79% food inflation looks worrisome too.
Sharp rise in inflation…

(Source: MOSPI, PersonalFN Research)

What's driving inflation up?
From March 2016, the retail inflation has jumped 94 bps (basis points) while the food inflation has recorded a massive 258 bps increase. A basis point is 1/100th of a percent. Within the Food and Beverages category, Meat and Fish, Vegetables, Pulses, and Sugar have witnessed an upsurge in prices in the past 3 months. The categories mentioned above have been the primary drivers of not only the food inflation but also the overall CPI inflation. As per the estimates of Financial Express dated July 13, 2016, share of price rises in Vegetable category in CPI inflation has increased incessantly from 1% in March to 17% in June. In simple words, for every 1% rise in CPI inflation, 0.17% can be attributed to Vegetables specifically, as far as the CPI reading in June goes. If you add up the price escalations experienced in Meat and Fish, Pulses, and Sugar; it becomes apparent that food inflation has driven the retail inflation almost single-handedly in Q1, FY 2016-17.

To read more about this story and Personal FN’s views over it, please click here.

After receding for a while, the bullish sentiment on the Dalal Street has emerged even stronger. Recently the Nifty and Sensex, India’s two widely tracked equity indices reached their highest level in the calendar year 2016. This happened on the backdrop of a dismal start to the year. China posed serious threats to global growth, and there was almost a consensus on Federal Reserve (Fed) raising interest rates in the U.S. Speaking about India, there were a few negative developments too. Despite making several attempts, the Government had failed in passing the GST Bill through Rajya Sabha in the winter as well as the budget session. Earnings growth wasn’t encouraging either. The rupee had started declining against US$ due to changing global economic conditions.

However, after that sentiment improved as the anticipated threats never materialised. China has somehow managed to keep itself afloat, and Brexit has made Fed think again about raising interest rates despite witnessing improvements in the domestic economy. In India, things have changed for better. The Monsoon has been good and is projected to be even better in the coming months. A good monsoon is a prerequisite in India for clocking higher economic growth. Companies in India have had a better Q4 in the Financial Year (FY) 2015-16. There's a likelihood that the GST Bill will be passed in the Monsoon session. This has given hope to domestic as well as global investors. As per the NSDL data, flow of foreign capital have been positive in India, February onwards.

To read more about this story and Personal FN’s views over it, please click here.

  In the course of business, you have to select the sum assured while buying insurance. Based on various factors such as your age, physical condition, and tenure of the policy among others, the insurance company charges you a premium. But now, doing the opposite will also be possible. In simple words, now you can decide how much premium you pay every month or a year, and based on which the insurance company will offer you insurance cover. Mahindra Insurance Brokers (MBL) has brought in a novel concept of ‘Pay-As-You-Can’.

MBL has taken inspiration from the FMCG companies which often use sachets to target customers looking to buy new products at affordable cost. MBL also believes that the low-cost segment is going to expand the reach of insurance in India. And, please don’t make a mistake. MBL is not going to act just as a distributor in this case. In fact, it’s also going to design policies. It will involve insurance companies only to underwrite such policies through a master policy. This means MBL will design policies but to decide whether to accept a particular proposal or reject it, the company will depend on insurance companies that have a specialised underwriting team to assess the risk involved in each proposal.

PersonalFN believes, this might be an interesting initiative and may result in a win-win situation for MBL, insurance companies and the customers as well. Coming up with low-value schemes becomes impossible for insurance companies considering the higher cost of floating products in the market. Insurance buyers will also get flexibility in deciding the premium payment depending on the affordability.

Having said that, PersonalFN believes, it’s always better to know how much insurance you require and pay for that, rather than deciding the premium first. Therefore, if affordability is not a problem for you, first try to know the precise insurance coverage you need.

Seasonality: Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes which recur every calendar year. Any predictable change or pattern in a time series that recurs or repeats over a one-year period can be said to be seasonal.

Note that seasonal effects are different from cyclical effects, as seasonal cycles are contained within one calendar year, while cyclical effects (such as boosted sales due to low unemployment rates) can span time periods shorter or longer than one calendar year.
(Source: Investopedia)
Quote : “Business is still more often about whom you know, not what you know”" -Alejandro Cremades

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