EYE ON INDIA: INTERPRETING INFLATION

The Wholesale inflation numbers released today registered at the lowest level since 2002 hot on the heels of yesterdays rate cut which moved the Repurchase Rate to an all time low of 5%. The rapid decline in wholesale price levels is not even across all commodities, nor has it been felt by the consumer fully –CPI for industrial workers (a measure of urban living costs) registered at 10.45% for January while CPI for farmers came in at 11.62%.

One specific component of Indian commodity matrix that we follow closely is fertilizer. Although agriculture officially accounts for less than a quarter of GDP, 60% of all employed Indians work in the sector. The majority for these workers are small farm operators, of which most are operating barely above subsistence level.

The impact of sustained higher costs for fertilizer, a subsidized commodity for which the country is officially 20-30% import dependent, are a constant concern for the Congress party as election loom.

Prime Minister Singh’s government is attempting to improve domestic capacity – fertilizer minister Ram Vilas Paswan has unveiled plans to the waive government debts of producers as part of an ambitious program overhaul the most antiquated factories by 2012 ( including the re opening of eight closed plants) and leave the country fertilizer self sufficient. The industry is currently in a complete shambles however, having been neglected during the past decade of unbridled growth, making the prospects for meeting these new goals dim without more significant stimulus measures.

Despite subsidies and government infrastructure projects, The grimness of Indian farmer’s lives cannot be overstated.

During the 90’s, the agricultural areas of Maharashtra, particularly the Vidarbha region, received the unwelcome nickname “the suicide belt” due to the high rate of such incidents among poor farmers there ( reportedly over 1,000 farmers took their own lives in Vidarbha in 2006). Although the national outcry caused by these deaths led to new government programs to improve rural life, the average Indian farmer is barely able to get by making any cost increase for fertilizer or pesticides untenable.

Anecdotal reports of increasing numbers of farmers that are going without fertilizer due to cost, despite the subsidized prices, are becoming more frequent. The impact on crop yields of going without, particularly if combined with poor weather conditions, could be catastrophic for the rural economy (and by extension relate consumer food prices nationally).

We continue to have a bearish bias on India, and will look for opportunities to short the equity market there again into any rallies.

Andrew Barber
Director