Latin Manharlal Commodities Pvt. Ltd.

Latin Manharlal Commodities Pvt. Ltd.

Union Budget 2013-14: Bridging the divide

Over the last couple of years finance ministers in India have been presenting the budget in the backdrop of severe economic constraints. They have had to grapple with global economic slowdown, monstrous inflation, weak monsoon andburgeoning twin deficits. Agriculture has been the big laggard on the Indian economy over the last few years and successive governments have been focusing on the sector as it continues to employ majority of the population. A weak agricultural growth not only affects food inflation but also has much more far reaching impact on the overall economic growth, and thus it is not so surprising to see UPA-II focus on agriculture over the last few budgets. Despite an outlay of Rs. 20,208 crores agricultural growth has been languishing as the problem is in the execution, the government this year has further increased the outlay to Rs. 27,049 crores (22% increase). In this budget the government has been focusing on three different themes: Reviving agricultural growth, Rural Infrastructure & Financial Inclusion. We believe that this budget is another step by the government to bridge the gap between two sections of society that exist in this country. We strongly believe that the government with the kind of numbers in the house and keeping in mind the state of the economy could have taken some bold steps in terms of reforms, fiscal consolidation and overall economy. Though we like the budget from a commodities perspective but we are disappointed to say that the FM has reduced budget to a non event and an account balancing activity.

With budget now out of the picture this government will have to do some serious work this year to revive the economy or it will leave mess for its successors to clean. We strongly feel that the FM over the last six months has shown some intent but needs to expedite the process. As the minister himself in his speech has said that “growth is a necessary condition and we must unhesitatingly embrace growth as the highest goal”. We hope that the government “walks the talk”

Key Highlights of the Budget:

Agricultural Focus:Agricultural growth is not just important in India because it drives the economy and employs 58% of Indian population but it is also one of the key factors that decide vote bank politics. We have seen in past governments been made and fallen purely on the basis of its policies focused towards this sector. We strongly believe that for any government agriculture should be focused as it is the key to inclusive growth in this country. We are extremely happy to see that the government has taken some key steps to revive this sector and widen the credit net to small and marginal farmers. Some of those steps have been taken in this budget while others have been an ongoing process.

  • Interest subvention scheme @ 4% now extended to private sector banks. There has been crunch of availability of credit to farmers and this step according to us will help in furthering the availability of credit to farmers. Also the fact that new banks looking out for license would have to focus on rural credit is a step in the right direction.
  • Technological advancement and new seeds have had one of the biggest impacts on reviving agricultural growth in the country, a case in point is cotton and mustard seeds. We believe that Rs.500 crore allocations would help in reviving the yields of other such crops.
  • The government this year is also focusing on coming out with pilot projects for developing new crop varieties and rejuvenate coconut gardens.
  • FPO’s (Farmer Producer Organization) was set up by the government in last five year plan with a motive to provide with education to farmers on seed procurement, credit, soil management etc. The government has now allocated Rs.10 lakh per FPO as part of working capital. Though FPO’s have been a success in NE other states are yet to embrace it with open mind.
  • One of the key reasons of fast paced agricultural growth in some states has been the fact that they have been well irrigated due to the efforts by their state governments. India has always been over-dependent on monsoon for water, one of the breakthrough steps to reduced dependence on monsoon was taken by the then Honble. Prime Minister Shri. Atal Bihari Vajpayee by linking rivers. This government has taken this break through project ahead by taking an ambitious step of linking waterways, roads and ports. We believe this will be a big game changer over the next decade or so.

Green Revolution: In 2011-2012 the then Honble. Finance Minister Mr.Pranab Mukherjee announced of a green revolution in Eastern part of the country with focus on developing pulses villages and palm oil cultivation. We believe that this has been one of the big successes of this government and this is clearly visible in increased production of pulses. We are happy to see that government has allotted a further Rs.1, 000 crore to this project.

It is really encouraging to see that the green revolution is reaping benefits, readers would remember that in our 2011-2012 budget report we had mentioned that green revolution (A green revolution that is spread Pan-India) was the key to India’s supply side problems. In fact history has shown us that unless a country is not able to feed 100% of its population it can never achieve an inclusive and sustainable growth.

Food security Bill – Rs.10,000 crores have been allocated by the government for food security. The government has assured that the Food security bill will be introduced this year. It is in urgent interest of the nation that the Food security bill is introduced as soon as possible as a failed monsoon can lead to severe shortage and spiraling up of food prices.

Rural infrastructure – Nearly 40% of India’s food produce is lost due to wastage, a figure which is one of the highest in the world and if not addressed will lead to alarming effects. We believe that this is due to inadequate warehousing and storage, a nascent food processing industry, production and supply bottlenecks, corruption in PDS and appalling rural infrastructure. The government has announced Rs.9, 954 crores to Rashtriya Krishi Vikas Yojna. Rural infrastructure not only includes building a world class storage infrastructure but also includes developing world class rural road network which acts as the connectivity between the farms and market place. The government has allocated Rs.80,194 crores for Ministry of Rural Development. It has also decided to now focus more aggressively on road networks in rural India as a part of “Pradhan Mantri Gram Sadak Yojna –II”. The government has also allocated Rs.20,000 crores to RIDF & Rs.5,000 crores to NABARD to finance construction of warehouses.

We are excited with the above steps but believe that much more needs to be done, the first step being an urgent need of removing huge price gaps between wholesale and retail prices.

Commodities Trading:The ghost is at last out of the bag and CTT has been levied on trading in non-agricultural commodities. The FM has levied 0.01% of CTT. The damage of CTT is yet to be estimated but it could turn out to be one of the biggestdeterrents to overall growth of commodities market in India. Though the positive is that the CTT is not as high as it was earlier estimated, we could atleast see a drop of 5%-10% of volumes. According to us this may not impact the regular traders but would affect arbitrageurs. One of the biggest positive for commodities market has been the fact that now commodities trading are no more regarded as speculative trading, but the income would now be considered as business income and can be offset against losses. We believe this is the first step towards opening of commodities markets in India.

Both these steps could pave way for bigger reforms in commodities markets like passing of FC( R ) A and introduction of options.

The finance minister in this budget has not taken a very reformist stand; he has more or less maintained the status quo. We feel that with a majority in the house, and given the tough economic conditions the FM could have been much bolder and ushered in a phase of revolution. All in all we believe that this budget has maintained its focus on agriculture, but has fallen short on big ticket reforms. The government has missed a big opportunity.

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