Long Thread on Farmers protests & Agri reforms: What is the protest all about? Who gets impacted & how? Why are protests concentrated in Punjab & Haryana? Are these really farmers or traders losing grip on monopoly? Are farmers being misled? Let numbers do the talking. Here we go
A top-down view of Indian production is in order here. What does India’s agriculture produce in a year? I like the below chart for FY 2015. Now to understand the complexity, we’ll have to work with one crop & dig details. Let’s work with Wheat.
In 2020, India is looking at 105 million tons of Wheat produce vs 94 mn tons in 2015. What does the growth look like? See below the YoY growth of wheat in India. A 105 mn tons in 2020 will bust the chart below. Forget nay-sayers,Indian agriculture is doing great production.
Something is working well when production goes up consistently. However,while supply is great, demand is not growing as much. Look at the wheat consumption in India. As you see, the demand is consistently below supply by ~ 10 mn tons. Who needs this extra 10% wheat? Not Indians.
Can we export? Unlikely! This is where it gets complicated. Let’s see the United States Dept of Agriculture report on agriculture.The European Union, China, and India accounted for a little over 50 percent of the world’s wheat production (762 mn tons) in 2018/19.
However, we hardly export any wheat. India doesn’t even feature as a wheat exporter in chart below. India is expected to be a marginal net wheat exporter during the projection period. This implies that India is a price taker in wheat trade. We can't set the price internationally.
Even if we want to export, there is a major problem. Growth in wheat imports is concentrated in developing countries. Most developed nations with better purchasing are wheat surplus. Globally, the consumption of wheat is falling below the production as we see in the below graphic
Since developed nations have surplus, major wheat importers will be African nations. Hardly lucrative markets. It keeps the wheat prices depressed, closing the exports door for us. See the international prices of wheat & how these are relatively stable at $ 200 per ton.
This translates to Rs 1400 per quintal vs the MSP of Rs 1975 per quintal. So, MSP is a good 40% above the international prices! No exports can happen at this rate. MSP appears to be the root of current agitation. Farmers ask for a min price guarantee so he can predict his income.
We have already established the following (1)India already has wheat surplus & we need less of it (2)Advanced seeds are causing yields to explode resulting in bumper harvests which aggravate the problem (3) Since exports potential is absent, all produce has to be paid by Indians
If all produce is bought at MSP, farmers can look at an increasing production & rising income. Sounds good, except that the someone has to pay for wheat which we don’t need. Because if govt procures excess wheat, this is what happens. See the avg stocks of FCI for Wheat & Rice.
This stock is appx 3 yrs of production. These are absurd holding levels. Add to this the sudden spike in MSP rates in last 5 years & we’re looking at substantial deficits for the Food Corporation of India. How much deficit? Well, Rs 2.5 lac crores.
And look at the pace it is growing over the last 5 years. FCI’s borrowing from nation small savings fund has already risen from R 70,000 crore in FY 2017 to Rs 191,000 crore in FY 20. This is in addition to the food subsidy bill of Rs 184,000 crore for FY 20.
Who pays for this money? Well, we the people. And I’m fine for it if it does well for the farmer.
However, the challenges are much bigger & rarely solved by throwing money at the problem. As with most things, India is diverse & so are the issues.
Why are protests concentrated in Punjab+Haryana? I tried to explore the money trail (credit to G. Madhavankutty@ ET prime).Grapgic below indicates the % of wheat bought thru MSP in each state. As is obvious, 70%-80% of wheat sells at MSP in the 2 states. Rest of India,not so much
So, MSP is solving only for Punjab & Haryana farmers. It is irrelevant for rest of India. No wonder we don’t see others in this protest. So, do you still recommend MSP as the holy grail for Indian farmer? I doubt it.
MSP is breeding the same inequality that is manifested in every aspect of our system. Rich farmer gets richer & lobbies to maintain status quo. If APMCs stay, who gains more? Recall license Raj of the 1970s ? This brings us to the economics of APMCs.
Are APMCs really inefficient or have they been a victim here? Do farmers want APMCs or have they been propped up by trading lobby behind the scenes? I was also intrigued by the great deal of support coming from Punjab CM to the protest. Tax money trail could offer some clues
Look at the 2014 report of FCI published in the economic survey of India. We see that although Punjab & Haryana lead in MSP procurements, the net result for the farmers is almost the same across the country. This is due to the arbitrary taxes & fees that APMCs levy on the trade.
Punjab leads with 15% levies as % of MSP. In the end, farmers get a net Rs 1546 per quintal, which is not much different than his counterpart in UP or even Bihar. So, while MSP works for some, it certainly doesn’t work for the farmer!
That explains the huge political support “behind” the farmers. At 15% taxes/levies on Rs 64,000 trade annually, Rs 9600 crore is on the table here for stakeholders in Punjab, including the state govt. It can move a lot of mountains & yes, a protest as well.
Conclusion: So where does that leave us? We can increase overall prices & guarantee MSPs, but APMC brokerages & taxes ruin it for the farmer. The middlemen, including the state gets richer via brokerage on farmer’s produce. So much for being pro farmer govt.
Additionally, the FCI keeps getting bankrupt & will eventually eat into our taxes. I take the liberty of assuming that most urban consumers are not willing to pay more for agri produce, else onion prices wouldn’t have changed govts in the past.
Also pls don’t forget about PM Kissan scheme that pays fixed income to all farmers across India. Direct transfer thru such schemes is always much beneficial in India vs the inefficient APMC & FCI procurement doles thru MSPs.
The only way to pay farmers more is to cut the broker & state taxes. Just compare the mandi prices & what retailer sells for & you would know the potential. I think the new laws do exactly that. But of course, it will hurt some along the way. Just like every disruption does.
Thanks to @republic TV for the opportunity to speak about farm acts and how the farmers are being misled. Watch repeat telecast today at 4.30 PM Sunday on R.Commentary with Abhishek Kapoor @itootweet
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LONG POST: #EconomicTimes article
Why does the India bull look tired?
Over the past week, Indian equity markets are up almost 2% with the Nifty trending at 23,589. Retail investors are happy and renowned experts are going out and claiming it to be the ‘start of a new bull run’. However, there are a few who feel the next 10 years will be different from all the past boom periods that India has witnessed so far.
In the past two decades, the #Nifty50 has returned 12% annually. Smart investors believe the country can do far better than this number in the coming decade. But markets are cyclical in nature. There is a high chance that we might actually get lower annual returns compared to the past.
Markets have had a sizeable correction from the highs seen in last September peak. It has been a painful grind in the last six months for investors. For nearly 80% of them, the correction is somewhat a new phenomenon, and totally unexpected. These new investors had come in for linear returns and were trained to ‘buy the dips’. They had the best for the past 5 years, up until now.
When the story was about demographic dividend and companies rising to fulfill the unsatiable demand from young India, why should that come to a halt? Why do stocks correct after all when the going is so good? And why would foreign investors want to leave in such a hurry?
All great questions. For those who started after 2020, there are some valuable lessons to learn here. Well before they prepare for the next bull run.
What was driving the rise?
When you buy a stock, you buy a share in its earnings. The earnings per share (EPS) decides the price it should trade at (at least some of it). The other element comes from the market sentiment, which relies on future prospects for the current earnings. What India witnessed last five years was the boost on both these elements. Let us look at earnings first.
Nifty EPS was around INR430 by end of 2019. During the next 4 years, by the end of 2023, it rose to INR950. That is an astounding CAGR of 22%. If you looked at the historical 10-year trend till 2019, the range was much below 10%. This earnings surprise increased valuations. Common sense would tell you that Nifty should double too. And it did. From 12,500 to neat 25,000 rise was largely justified. At least in theory!
If we broaden this story and look at the entire listed corporate space, corporate profits jumped from around INR4 lakh crore (USD45 billion) to INR16 lakh crore (USD170 billion) during the same duration. This was nearly 4.8% of GDP. No wonder, we saw a bump in valuations across Nifty 500 Index.
Markets assumed the similar rate of growth and priced the stocks accordingly. Not to forget, the flow of domestic money to mutual funds provided more gas to stocks outside of Nifty 50. The mid- and small-cap stock prices grew significantly higher, at almost 30% CAGR for 4 years. This was far in excess of the EPS growth in these stocks.
This super growth phenomenon however is always shortlived. We’ve had these phases before. There is nothing new about this.
Look at the above chart for corporate earnings to GDP ratio, which is a very reliable indicator of how well the listed market is doing within the larger economy. We see that corporate earnings grew from 2.1% of GDP to 4.8% of GDP between 2020 and 2024. However, we can also see a similar rise to peak between 2003 and 2008, after which a period of slowdown began till 2019. While this doesn’t imply that the path will exactly be the same now, the key message is that earnings are cyclical. And so is the Indian economy.
Why did the markets fall and why now?
Though the market had accounted too much exuberance in 2024, it failed to recognise this EPS growth was never sustainable.
So, why did the earnings spike post 2020?
A confluence of factors resulted in earnings growth post 2020. Firstly, banks’ balance sheets were already clean after years of NPA write-offs post 2014. After pandemic, we had a sudden demand surge — IT services got huge demand boost from US, there was discretionary revenge spending by consumers & finally the govt capital expenditure increase 4 times to INR11 lakh crore (USD125 billion). All of this happened within 3 years. Indian retail credit penetration increased from 20% of GDP to 43% of GDP. So much of the consumer spending was done with credit binge too.
All that spending is behind us now. So, unless you have a reason to believe that the economy has drastically improved after 2020, it is safe to assume that the earnings growth will also correct. And this is already underway since 2024. Estimates for Nifty 500 companies is at 7% topline growth. This is just about keeping up with inflation.
For context, look at the topline growth for #Nifty500 companies below. It tells a similar story since 2010 where sales growth slowed after 2009. And then the huge spike after 2020.
While sales growth slowed by 2022, margins expanded, which concealed the slowing topline. That provided some cushion to the EPS story for a year. However, EPS can’t grow continuously if topline stagnates.
When will markets capture previous peaks?
Depends on your outlook on earnings and India’s economic growth. It is worth noting that after 2009, corporate earnings grew at single digits for next 10 years. Nifty 50 and Nifty 500 returns were in the range of 8% and 7%, respectively for the next decade.
The situation was not exactly the same then, and reasons may be different now. But the economy does go through a period of moderation after every exuberant cycle. So do markets.
The current correction should not be seen as a minor blip that recovers fast. It is unlikely to be a V-shaped recovery because it is not driven by a special event. It is a sales slowdown which has been in the making for 18 months now. Just that the earnings took some time to reflect that.
Thus, the recovery may take as much time as it takes for the consumer to recover. Also remember, the market slowdown impacts gross spending levels too. If you don’t have stock buoyancy, you are unlikely to buy bigger homes or take that exotic holiday. As government tries to contain fiscal deficit from 4.8% to 4.4% of GDP this fiscal year, the spending boost from the Centre may become difficult.
With history, it is safe to assume that junk stocks will not gain the glory they did. But eventually, markets do recover if the economy continues to march forward. That is the key here. If the GDP growth stays in 6% range, corporations will figure out a way to come out of the earnings stagnation. And some new winners will emerge.
My sense is that next 5 years may be a period of moderate growth in #India , wherein market absorbs the current high valuations. They may appear cheap on current earnings but are probably not accounting for likely slower growth in future.
Eventually, the returns from Nifty 500 are likely to be around 10% for the decade between 2021 and 2031. So, you will be fine as long as your portfolio is well balanced. Ignore the noise and get back to work. If you were expecting this to be a linear rise, then that assumption was never right to begin with.
One last thing
The comparisons that forever bullish gurus quote from US markets don’t apply to any other country. If you pick a historical point from US markets, you can prove almost anything. India story works differently too, unless the economy undergoes a drastic transformation, something like China had for last 30 years. While that is possible, it is also extremely rare.
And this is exactly where the bulls and the bears begin to differ substantially. You can take your pick. The perma-bulls continue the story of India imitating China growth. The story has been alive for 25 years now. Evidence and experience do not justify this thesis.
A healthy dose of realism is always good in investing. Else, you end up buying expensive con stories from faceless sellers who get rich with your money. Some of you may have realised that by now.
The India bull ran fast as it could. But it needs some well-deserved rest. Let it rest for now.
The chart is “corporate earnings to GDP”. Pls ignore the header. Numbers are fine.
Follow up Thread 🧵: Farmers Protests:
They’re back!
If Karl Marx were to hear about the farmers protests today, there is a chance that he would be back too. Just like the farmers are back with the same old MSP demand, that is not only un-justified but unethical too.#FarmerProtest2024
See the picture above Does the farmer in the picture needs a govt subsidy or support?
The gentleman circled in red is a typical rich farmer. What about those circled in blue, that are almost forgotten in background. Now who needs govt support? Who needs the MSP?
Marx would define these farmers as classic “Bourgeoise” that us “Proletariats” should fight against. But there is something that either motivates them or keeps them dis-satisfied.
What forces the wealthiest (Yes) ones to come out, protest for higher prices for farm produce?
Short Thread: HDFC BANK
Why are the FIIs selling the largest bank?
A classic case of different paradigms – You have a framework of valuation & begin to wonder why the world is not getting it? There are 2 options – Either understand the other paradigm or change yours. #HDFCBank
I’m not sure if you will change your valuation framework. But at the end of this post, you will definitely understand why FIIs may be selling.
I’ve always been perplexed by this comparison that I’ll share now. Let's take a quick dive -
Book size:
Look at the top 3 US banks that collectively control 45% of assets & lending amongst US banks. Compare the size & scale.
HDFC bank is appx 1/10th of a Bank of America(BOA) in assets. JP Morgan is 12x & Wells Fargo is 6x of HDFC in assets.
LONG THREAD: SBI Cards IPO Follow-up:
Revisiting the #SBIcards IPO thread (Mar-2020). IPO price - 755, price today - 768.
In Mar'20, I quoted "They say market is a great teacher. If this one makes money for investors, I definitely would have missed some lecture in investing".
Well, looks like some of us did learn something. Markets at all time highs, SBI cards is still flat since 3 years. I don’t want to sound arrogant claiming victory. We are all learning here. So let's revisit what SBI cards promised (or implied) & what it delivered. Here we go -
Cards in force & spends:
We see glossy numbers again in FY23 annual report: 22% YoY growth in cards,30% YoY in receivables. What is the benchmark? Is it good enough vs IPO projections? Why are the graphics starting from 2019, exactly when the pre IPO disclosures end ????
LONG THREAD: Golden Era for Indian Equities - Behind or Ahead ?
As Nifty crossed 20K, time to take stock of what returns to expect in future?
Examine the journey so far & a critical analysis on CAGR returns which are not quite the story we’re sold. Let’s go for a ride: 1/n
We’ve all heard this story. Had you invested in Sensex at inception in 1979, you got 660x returns, CAGR of ~17% . Simple math- Sensex started at 100 & now is hovering at 66,000.
If only making money was that easy. Argument is not that strong if we scratch below the surface.
2/n
I’ll make an effort to validate if there is more to this story than meets the eye. And there is.
As most funds like to present the market returns since inception in 1979, it is important to see the Indian stock market history in 4 distinct decades.
3/n