Saturday, September 29, 2012

Grow, baby, grow - all the guar you can

I don't know what to make of this story. An economics soap opera ? How the most unexpected things can happen  ? How sometimes prosperity can hit you from the strangest of directions ? Read on - judge for yourself.

The story starts in a very boring manner. Everybody knows Americans guzzle gas. With the Sheikhs turning the screws, Americans are feeling the pinch. Ouch - the price of oil is hurting. Drill baby drill, is fine, but oil is, alas, not to be found. Need new forms of cheap energy so that Americans can continue to guzzle away. Suddenly they discovered a new "source" - Shale gas.  Apparently natural gas is  found in rocks called shales. And apparently shale gas is rather plentiful in the US. Wonder of wonders, use of shale gas even releases lower greenhouse gases than evil Oil.. Voila, the new gold rush is on. 

All very good. What's new. This sort of thing happens all the time. The real interesting bit is that, in order to extract this gas, you have to do "hydraulic fracturing" or "fracking". Without getting too technical, an essential ingredient in this process is an obscure agricultural product called guar gum. You simply can't extract the gas without guar gum ! Guar gum is derived from the , rather ordinary, guar bean.

Cut to Basni, on the outskirts of Jodhpur in Rajasthan state in India. This is a drought prone area, near the desert. The sight of fat , sweaty Americans is not new in this area as they come to tour the Thar desert and see the palaces and forts of Rajasthan. But suddenly the villagers started to see far more Americans than usual. This lot was different. They did not want to see forts or palaces. They wanted to buy all the guar you had !

You see, Rajasthan is the guar producing capital of the world. The farmers here are mostly poor - this is after all desert area. They have been cultivating guar for centuries to feed their cattle. For some strange reason guar doesn't grow well anywhere else in the world. 90% of guar is grown in India - the balance 10% in neighbouring Pakistan. Some 70-80% of guar in India is grown in Rajasthan.

It was, as if, money was raining from the sky. Guar used to sell at Rs 10 a kilo. At Rs 40, the farmer made a nice profit.  In December last year it touched Rs 70. And in March, this year,  it touched an impossible Rs 300 !!

Farmers who were in debt , or dirt poor, are suddenly seeing untold riches.  They've built a house. They've bought colour TVs. Two wheelers are plentiful - even the odd car is seen. Thousands of farmers have suddenly been lifted out of poverty into, what for them, is a quality of life they could not have even dreamt about. Guar gum is suddenly, back gold. The largest Indian agricultural export last year by far, more than basmati, more than cotton, was guar gum !

Of course, it has all the makings of a stampede. Everybody, man, woman and dog, is trying to grow guar.  Factories have sprouted adding crazy capacity to extract gum from the guar beans. Traders, middlemen and the usual scoundrels have descended to trade on the guar market - there was so much of the Wild Wild West going on that the government has banned the futures market in guar.  There has also been much stockpiling by the energy firms that the next season demand for guar might plummet. Lots of punters will burn their hands.

But for the next few years at least, the trend is inexorable. Shale Gas will be an important source of energy in the future. The largest reserves are in China, another energy guzzling economy. Nobody has yet found a way to extract this gas without guar gum. Nobody has also found a way to grow this economically outside of Rajasthan. So there is much prosperity waiting in store for the agriculturists of Rajasthan. Its a great story - those hardy souls deserve every bit of it. However you could be forgiven for some rather puzzled faces as to how come money is raining from the sky when even water doesn't. And the even more puzzled stare of their cow which is wondering, whatever happened to the guar bean it used to chew contentedly, not so long ago.

Monday, September 24, 2012

Primum non nocere

Sometimes, rarely, you read something that resonates  so much that you nod your head right through and maybe even develop a crick in the neck.

Such was the piece I read today under the somewhat hyperbolic title " How to stop hospitals from killing us".  I opt to offer it to you without comment,  with only a strong recommendation. I just chose a less fanciful title that simply means - First do no harm.

Perhaps an appropriate title, for, this is a mini landmark post - my 500th.  Even for writers, this is a useful tenet to follow. Never thought I would reach this figure when I started blogging one winter's day in Guangzhou 3 years ago . How much life has changed in this short while. Thank you, dear readers, for the support, the encouragement, your comments and points of view. My life has been immeasurably enriched by you and, for that, a big, big, big, heartfelt thank you.

Wednesday, September 19, 2012

47% vs 97%

Mitt Romney is in a  soup over his 47% remark. In some remarks he made at a private meeting he said that 47% of Americans do not pay income tax (fact) and implied that these were scroungers (rubbish). But he was factually accurate in that 47% of Americans do indeed not pay income tax - although to be fair about that half of that lot do pay payroll taxes which is a form of income tax meant for funding social security and Medicare.

The purpose of this post is not to wade into the political controversy. But simply to point out the fact that if Romney were in India, he would say 97% of the population does not pay income tax. That's right - only 2.8% of Indians pay any income tax .

That's not to say 97% of the population does not pay any tax at all. Indirect taxes like VAT, Sales Tax, Octroi and a whole host of devilish taxes are levied on everything. Even a beggar buying beedis is paying all these taxes. But income tax, the largest revenue earning component of the budget is paid by only 2.8% of Indians.

Of course, this is a headline grabbing statistic that somewhat obscures the facts. India is a young country with a large number of children. They obviously are not meant to pay taxes (although I am somewhat loath to mention this as Ramamritham might pounce on the idea and design a tax for them). But clearly there is something very wrong in the Indian taxation system.

Surely so much of India is not dirt poor. The fact is that lots of people dodge taxes. Perhaps the true number of those who should be paying taxes is three times this number. Still, even if you say by rigorous enforcement of the law the number of tax payers would rise to say 9% - three times the current number, even then this is awfully small. How can a country which wants freebies and subsidies for everybody be financed largely by just 10% of its population.

Three things are blindingly obvious

- Economic growth for everybody should be the single most important priority of the government and society ; millions must be given the opportunity to earn enough income that they pay taxes. If ever there was a case for learning from the China model, this is it. Get rich first; then worry about income distribution.
- Tax evasion is clearly rampant. Here Ramamritham is indeed trying hard, but the scale of the problem beggars belief
- Tax exemption for agricultural income and long term capital gains has to go. If you earn sufficient income, whatever the source may be, you have to pay income tax.

You can only soak the 3% so much.

Sunday, September 16, 2012

What did you have for lunch ?

Newspapers are falling over themselves in trying to figure out what happened to Manmohan Singh. What has suddenly prompted the slew of economic announcements. And what has made him so brave after all the dithering for so long. While there has been much speculation, I am afraid all the pundits have got it wrong For, you see, in order to understand the behaviour of all our leaders over the last two days, you have to look no further than what they ate.

Firstly Madam Gursharan Kaur has been making Dum(b) Aloo (PJ courtesy Chotu) all this while. She switched two days ago to Makki ki roti and Sarson ka Saag. It is well known that the said food, when washed down with copious amount of buttermilk rather emboldens a certain group of people at 12.00 noon. If you notice, all the policy pronouncements have come out at 12.05 over the last two days.

At the other corner of the country, you may have noticed that there has been no comment from a certain portly lady. For she normally has Thayir sadam on Saturdays and Sundays for brunch. The soporific qualities of this food is rather well known, so the good lady is, I am afraid, fast asleep and hence has not commented.

Her neighbour, a former Prime Minister is in an even deeper sleep. His lunch is usually Ragi Mudde which, has been scientifically proven to be the miracle cure for insomnia - that's why shops in this state open for business at 11.00 AM and then promptly close for the afternoon siesta at 12.30 PM.

One of the ladies closely watched has been cooking copious quantities of Ilish Maach. Now everybody knows that sane humans from outside the state run a hundred miles when a worthy pours mustard oil to start making this dish. Perhaps that's why nobody wants to keep this lady company and perhaps that's also why she says cholbe naa to everything 

A father -son duo, also closely watched are thoroughly confused and not sure what they are doing. This is because their lunch menu comprised of kebabs, kormas, biryani, kaliya, nahari-kulchas, zarda, sheermal, roomali rotis, and warqi parathas. After such a lunch they are walking about in a daze and therefore not very clear of what is happening.

The leader of the opposition has called for a bandh in protest on Thursday. Did you wonder why Thursday ? Because in her household Kadi Pakora is served only on Wednesdays. Now no self respecting person from her region will embark on yelling at two thousand decibels unless fortified with Pakode which has marinated in Kadi for at least 3 days.

What about the firebrand controversial leader from the land of the Mahatma. He is sulking because Vadilal ice cream is not available in the freezer outside his house - all stocks having been diverted to Law Gardens where pencil slim women who are just married are frenetically trying to put on a mountain of weight.

The only lot which are yapping away are the business types who are  falling over themselves in delight. Do you know why ?? On weekdays they have to do business breakfast meetings where they have to slurp corn flakes (yuk)  and shovel scrambled eggs (doubly yuk) in an effort to look corporate. Thankfully at weekends their bibis are serving parathe or idly/dosa which they are allowed to eat with both hands. That bliss is what is causing them to issue orgasmic remarks of delight.

Its all in the food ...........

Tuesday, September 11, 2012

China's next emperor(s)

Here's a completely political piece, which I wrote as a guest post on my good friend Sriram's blog. I normally don't stray into the political arena, but couldn't resist this one !

What say you ? If you like, leave a comment on his blog.

The emperor's new clothes

Somebody has to say this. Like the kid from the proverbial Hans Christian Andersen's tale, who exclaims that the emperor is actually naked, I will go ahead and say it. Stock markets have become a weapon of mass destruction.

The original purpose of stock markets was to become efficient allocators of capital. Capital was always scarce and economics needed a mechanism where capital would be pooled from investors and allocated to the most efficient users of capital. Voila, the stock market was born. It is important to remember why this mechanism was created in the first place.

One of the most important benefits that stock markets provided was liquidity. Investors needed liquidity to be able to withdraw their investment without affecting the company that they invested in. Contrast this with property markets which are not very liquid - try selling a property, especially in India. Liquidity was , and is, provided in stock markets by speculators. They performed the useful function of ensuring liquidity and hence were tolerated even though speculation climbed to above 90% of all trades in stock markets.

But witness what has happened in the last 10 years. Most of the trading is now done by computers against computers. By automatic trading ; not by human decisions. A concept called High Frequency Trading has come into being. Big trading firms have invested in creating a competitive advantage where their automatic trading computers can gain a few nano seconds advantage over competition. I am not exaggerating  - a few nano seconds advantage. A millisecond is considered an eon in high frequency time. Two critics of the way stock markets function today - Sal Arnuk and Joseph Saluzzi have been laughed at for proposing a solution that firms honour the prices they offer for a share for at least 50 milliseconds.

Software is vulnerable, as all of us know. Knight Capital, an American Equity broker, started using a new software programme to execute its trades on 1 August. Within one hour of the market opening errant trading had cost the firm $440m. It virtually went bankrupt and only escaped from near death at a huge cost and will never be the same again. Such events are now becoming not uncommon. In May 2010, The Dow Jones Industrial Average plunged 1000 points in minutes and for a brief period Accenture was trading at 1c a share !

Such high frequency trading is not performing any usual social function. They are not based on a company's future or a view on the economy. This is pure gambling based on tiny changes in price. The amounts of money are so huge - several times the GDP of the world, that a catastrophic systemic failure is a real real risk. It almost seems to be a question of when, and not if.

I submit that the original purpose of stock markets has got grossly distorted and weakened. Before a meltdown occurs, it is important to go back to the roots - stock markets have to be reborn as efficient allocators of capital and not a Las Vegas on steroids. Its better to do this before the calamity hits, rather than after.

I say this loud and clear. Almost everybody on Wall Street, Dalal Street, etc etc, is stark naked. Unfortunately, that is not a pleasant sight - potbellies, warts and all. What does it say about our society, when its best brains are running naked and looking as ugly as hell. This naked horde might do well to remember , as The Economist points out, the advice of Warren Buffett, the most successful investor in history who says that his ideal holding period for shares is for ever.

Wednesday, September 5, 2012

Directorinas wanted

Meet Jean-Claude Moreau. Brussels' answer to Ramamritham.  It is well known that Homo Sapiens Ramamrithamitis is thriving beautifully in Brussels  under the umbrella of the European Commission. Monsieur Moreau has excelled himself in a number of fields and he is keeping with this tradition in trying to bring legislation that women should have a quota of 40% on the Boards of European companies.

We in India, know all about quotas and reservations. But surely Europe has better sense. Apparently not. M Moreau noted, after years of diligent research, that women only constitute 13.7% of directors in large listed companies in Europe. Given that women certainly constitute 50% of the population, and apparently 45% of the workforce, this was considered totally unacceptable.The Solution ? Legislate a quota. Wow. Only a Jean-Claude Moreau can think of that. It would be hard to think of a dumber idea.

There is no doubt at all that women in the workplace are discriminated against by culture, by religion and by male chauvinism in many parts of the world.  But only rarely so in Europe. The reason why women don't occupy a natural 50% in the Boardroom there is down to two things - a male club that does not easily let in others and the difficulty of getting good childcare which makes talented women drop out midway in their careers.

The male club is rapidly dwindling away, at least in Europe. Sheer talent cannot be suppressed anymore thanks to the brutality of the market. In major corporations today, I dare say, merit usually stands. The market ensures that there is a 100% quota for merit - man, woman or otherwise. No thank you, M Moreau for your contribution. Sure the glass ceiling exists in many places, but the speed at which it is crumbling will be far greater than what M Moreau is capable of in action.

The real problem why women are underrepresented in senior management is simply the age old problem - women sacrificing their career for children. M Moreau has two options to solve that problem. One is to allow free immigration of Filipino nannies - the good that will do to the world as a whole is immeasurable. If he doesn't have the guts to do that, the alternative is for him and his fellow bureaucrates to all become child minders - that way they will contribute more to the society than being babus and dreaming up silly ideas like quota for women on Boards.

I have another suggestion for M Moreau. First introduce a quota of 40% for women amongst the senior babus in Brussels. Then we shall see about Boards of private companies.

PS - Jean-Claude Moreau is a figment of my imagination, just as Ramamritham is, and has the same qualities. In the unlikely event that a  real JC Moreau ever reads this, no offence mate !

Sunday, September 2, 2012

A tragedy all around

If it wasn't so sad, it would have been a classic case study where everybody was at fault. The Marikana miners strike in South Africa is a disaster where every party - the miners, the company, the unions, the police and the government deserve censure for the way they have conducted themselves.

Here is what happened. One of the platinum mines belonging to the mining giant Lonmin is in the Marikana area in South Africa. In early August there was a flash strike over pay demands. The situation escalated badly and resulted in a violent incident on 16th August when police firing resulted in 34 miners being  killed and 78 injured. Prior to this 2 police officers had also been killed. Since the infamous Sharpeville massacre in 1960, this was the worst violence in South Africa, and certainly the blackest day in the post apartheid era.

The company Lonmin deserves some of the blame. Its workers are poor and live in shantytowns without any decent housing. Since 2001, the price of platinum has quadrupled in the market. And yet the wages of the workers have risen by only a small amount. When profits are soaring and there are not commensurate benefits to employees, the situation is ripe for unrest. Lonmin also appears to have done little by way of social responsibility, and the little it did was often the subject of political patronage. It is impossible to be in an island of profits when surrounded by poverty. With such inequality, the flashpoint was inevitable.

The strike by workers was over a demand to triple their wages. Those of us in India, who remember Datta Samant would recall such absurd demands and militant action. No company is going to triple  wages in one go. There is also no doubt that miners resorted to some violence - two policemen were killed and it appears that their weapons were snatched and used against the police.

The unions were heavily politicised.  The dominant union was affiliated to the ruling ANC and an outsider union of the opposition was trying to break in. One upmanship on taking extremist stands and violence seems to have resulted.

The police have certainly overreacted. Yes two of their own were killed and they seem to have extracted revenge.  They were corralling workers with barbed wire and when threatened, resorted to extreme force with live ammunition. But was the force justified ? There is hardly any industrial dispute in the world where 34 people have been killed.

The government has behaved awfully. For long it has been indifferent to the appalling inequities in South African society and a small black elite has gone very rich through massive corruption. After this incident happened, the public prosecutor arrested some 270 striking miners and charged them with the murder of the 34 under an apartheid era law! The outrage was universal, and they have since had to withdraw and release the miners.

The real tragedy is on those who died - miners and policemen - and the injured. Nothing is going to bring back the dead. Is any business worth the loss of so many lives. And is any cause for agitation worth this price ?

South Africa has a real problem with inequality and seems to have no sensible way to tackle it.  It is of course, a global problem with no easy answers, but in South Africa the problem can be seen at its most acute form. If it does not find even a partial answer, the spectacle of Zimbabwe looms.