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Food Price Shock May be in Wings

 

Consumers awoke this morning to a sharp rise in the price of gasoline. By next month, they may also be facing higher prices for two other everyday items – imported cooking oil and pulses – because of the weakness of the rupee.

India, the world’s largest importer of edible oil, has so far not felt the pinch as a fall in international prices for oil has largely offset the impact of the weakening currency. (A weak rupee means it takes more rupees to buy the oil, which is sold in dollars.)

However, with the rupee expected to slide further, analysts say it is just a matter of time before importers either hold off increasing imports even though the coming months are a time of peak consumption. They could even slow their imports, a move that would further tighten domestic supply. Either way, prices are likely to rise.

The rupee’s weakness “is definitely hitting us as it has increased our cost,” said B.V Mehta, executive director of the Solvent Extractors’ Association of India, a trade body for the edible oil industry. “Everybody will wait for the dust to settle on the rupee before increasing their imports.”

The total cost of cooking oil imports is expected to rise to about 500 billion rupees ($8.9 billion) in the year that began April 1, from 400 billion rupees in the previous 12 months, largely because of the fall in rupee value. Those higher costs are likely to be passed on to consumers.

A flattening or reduction of edible oil imports would be a sharp reversal. In the first six months of the marketing year that began Nov. 1, edible oil imports rose 31% from the same period a year earlier to 4.6 million tons.

Consumers also may be paying more for pulses, the main source of protein for a majority of the population, because of a similar dynamic.

“We have absorbed most the rising import costs so far, but if the rupee’s free fall continues we may have to stop imports or raise the prices,” said Bimal Kothari, vice president of the India Pulses and Grains Association.

The country imports around 3 million tons of the protein staple annually.

Prices of milk and poultry are also expected to rise because of a 50% jump in the cost of feed material.

One possible plus for consumers is that the monsoon rains are expected to be normal and that has brightened the crop prospects for other staples such as rice, oilseeds, sugar and domestically-grown pulses.

“The overall scenario doesn’t look too good in the coming months especially for the imported food items like edible oil and pulses,” said Naveen Mathur, associate director for commodities and currencies at Angel Broking. “The food prices may escalate further. It may go through the roof. [Compiled from DJ Reprints]

Always Yours — As Usual— Saurabh Singh

 

Economic Growth- But No New Jobs:Later Half of First Decade of 21st Century India

Have 20 years of economic liberalization been kind to the poor? In particular, how have India’s Scheduled Castes and Scheduled Tribes fared since the country opened up to the forces of economic reforms? Already politically empowered, have they also been economically empowered by liberalization?

Already politically empowered, have India’s Scheduled Castes and Scheduled Tribes also been economically empowered?

An important new study by economists Viktoria Hnatkovska, Amartya Lahiri and Sourabh B. Paul examines the economic performance of SC/STs by analyzing a large mass of data from five successive rounds of the National Sample Survey from 1983 to 2005.

The study is among the first to examine the behavior of wages, consumption, education and occupation choice for SC/STs compared with the rest of the population, exploiting the large and rich NSS data.

The study’s three principal findings are striking. First, it finds significant convergence in educational attainment and occupational choice over the period of the study. In 1983, non-SC/STs had, on average, 3.62 years of schooling, against 1.41 for SC/STs, a discrepancy of 157%. By 2005, non-SC/STs had 5.6 years of schooling on average, while for SC/STs it was 3.2 years, so the percentage gap had closed to 74%. Non-SC/STs still dominate white collar employment, which tends to be higher paying than blue collar and agricultural work, but the gap has narrowed from almost three times as many non-SC/STs in 1983 to about 1.5 times as many in 2005.

Second, the report finds a “statistically significant” movement towards convergence in wages between SC/STs and everyone else. A statistically significant finding is one in which we can have confidence that the results are genuine and not an artifact of measurement. In particular, the authors find that the “wage premium” – a ratio between the wages of non-SC/STs relative to SC/STs— has steadily declined from 36% in 1983 to 21% in 2005. To put things in perspective, the corresponding wage premium for white males over black males in the U.S. has stayed constant around 30% for the last several decades.

Third, the authors find that convergence in wage levels has been caused in large measure by educational attainment of SC/STs slowly catching up with the rest, although a gap remains.

But what explains these trends? Are wages converging principally because the education gap is closing (perhaps through caste-based reservation), or are other factors such as a lessening of discrimination against SC/STs responsible?

The authors show analytically that the majority of the wage gap can be explained by demographic characteristics, such as age, experience and whether people live in a rural or urban area. But the single most important determinant of the wage gap is the gap in educational attainment, the most important demographic difference. The implication is that the narrowing wage gap is indeed a result of the narrowing education gap.

The study also finds that caste-based reservation had a “negligible” effect on the wage gap. Because of its potential policy significance, this finding must be interpreted with caution. The finding is that reservation by itself cannot account statistically for much of the narrowing wage gap.  But that, of course, doesn’t mean that reservation isn’t important. One cannot rule out that reservation indirectly has led to a narrowing of the wage gap, working through the effect of allowing SCs/STs to catch up in terms of education and occupation choice.

There is corroborating evidence on the importance of reservation. For instance, the Indian Express reported recently that SC representation in upper-tier government jobs has increased almost eightfold, from 1.64% to 12.5% in the last 45 years. ST representation has grown almost 20 times. These figures reflect, in part, reservations of 15% and 7.5% for SCs and STs, respectively.

What lies behind these optimistic results? Leaving aside the debate about how big or small a role caste-based reservation has played, there are other market-based explanations that have played an important role, which the study highlights.

The most natural explanation, which is close to the heart of every free market economist, is that 20 years of economic liberalization have reduced the importance of caste and accentuated a move towards “market meritocracy,” where wages and incomes better reflect differences in education and other characteristics, not caste.

This reflects an idea proposed by the Nobel economist Gary Becker a half-century ago, that discrimination in any form becomes costlier when the market becomes more important, and so we will see less of it.

This is a plausible explanation but isn’t the only possibility. The study also flags the increased importance of community-based social networks bringing together SC/STs. Closer integration may lead to what economists call “network externalities,” so that every member of a group benefits more from interacting with their peers than if they were on their own.

The bottom line is that there’s convergence between SC/STs and everyone else, but convergence doesn’t mean they’ve completely caught up. Nor does it mean that caste-based reservation has not or will not continue to play a role.

 

Always Yours — As Usual — Saurabh Singh

Source: http://blogs.wsj.com/indiarealtime/2011/11/28/economics-journal-are-indias-poorest-catching-up/tab/print/

 

 

US Prez Barack Obama as well as The rest of the world, too, is having nightmares about a possible US debt default

Last Seven Sleepless Night of United States President Mr. Barack Obama

The Reason Behind the Phenomenon has been detailed below in Issue and It’s possible reason Format.

What is the crisis about?

Since 1917, the US Congress has stipulated that there has to be a statutory limit on US public debt (debt of US federal govt). This limit has been periodically raised and now stands at $14.3 trillion (95% of the US GDP). The US will hit this limit on Tuesday, Aug 2, unless Congress approves a fresh hike. But the Republican-controlled House of Representatives and Democrat-controlled Senate haven’t been able to work out a consensus

Why are they fighting?

The Republicans want any debt limit hike linked to deep cuts in govt spending. They want the increase to be effective for a year, with fresh discussions after that. The objective is obviously to make it an issue ahead of the 2012 presidential elections. Democrats favour tax increases and a one-shot raising of the ceiling. They are also opposed to any cuts that could jeopardize the economic stimulus and welfare payments

What happens if debt ceiling is not raised?

US govt can’t pay     employees, social security benefits, defence contractors, medical insurance bills and interest to lenders. Credit rating will plunge from top ‘AAA’ to bottom D’
What will be the global impact?

Govts, investors and businesses across the world will stop investing in US bonds. There will be panic in financial markets globally, with investors exiting equities for safe havens like liquid cash and gold

Does it affect India?

Indirectly, though much less than countries/blocs with big trade and debt dealings with US, like EU and China. Still, a worldwide downturn could hit Indian exports and FDI flows

When did this debt accumulate?

 Barack Obama (fighting recession, wars in Afghanistan and Iraq) $2.4tn

George W Bush (wars and tax cuts) $6.1tn

Bill Clinton $1.4tn

George Bush $1.5tn

Ronald Reagan $1.9tn

Earlier $1tn

Whose money has the US taken?

Foreign countries (including China $1.2 tn) $4tn

US public and cos $3.6tn

US federal system $6.2tn

 

Always Your — As Usual Saurabh Singh

FEELING HEAT ON US DEBT : EARNINGS AND INDEX POISED TO EXHIBIT UNWANTED OSCILLATIONS

Wrangling over the US debt ceiling and questions marks over corporate earnings mean markets are unlikely to get a break any time soon.

Wall Street is set to close its worst three months in a year as July draws to a close next week after a roller coaster ride for markets. Whacked out fund managers hitting the beach in August may find themselves fiddling with their BlackBerrys more than the little umbrella in their cocktails.

“I need a vacation, man. After all the stuff that’s happened in the last three months I’m pretty much shot, I’m getting weird,” said one New Jersey-based fund manager, who was packing his bags for a destination in the Caribbean as temperatures topped 100 degrees Fahrenheit in New York City.

With euro zone leaders having reached a deal for yet another bailout for debt-laden Greece, investors will be free to chew over the rancor in Washington with even more attention.

Negotiations between President Barack Obama and the top Republican in the House of Representatives, John Boehner, still looked far from a deal to avert a looming US default, lawmakers said on Friday, raising the likelihood of more volatility next week if no solution is reached over the weekend.

“It’s likely an agreement in any form will cause a relief rally for equities,” said global head of sales trading at Dahlman Rose in New York.

“Coming on the heels of overall pretty good earnings numbers and some sort of resolution in Greece and that could make for a rally in the market,” he said.

But on the other side of the coin, the prolonged and partisan dispute over solving the country’s debt crisis means there is still a big downside risk.

“Who knows where that is going to go,” as per an analyst at MF Global in Chicago. “We’re vulnerable to a buyers’ strike if we don’t get any news.”

In addition, the corporate earnings season suggests other risks could dog the market. Despite generally good results so far, there have been some worrisome signs. The S&P 500 rallied 6% in the run-up to reporting season, but earnings misses from big industrial names like Rockwell Collins and Caterpillar Inc weighed on the Dow and S&P 500 on Friday.

Earlier in the week several big consumer names such as Whirlpool and Pepsi warned about sluggishness in developed markets, sending their shares sharply lower.

“The market still has a high degree of skepticism in it,” said the analyst, summing up the earnings season so far.

As per him, he will be closely following earnings from sector and economic bellwethers next week. Those include the package delivery company UPS, chipmaker Texas Instruments, and online retailer Amazon.

Around 30 percent of the S&P 500’s USD 12.3 trillion market caps have reported earnings so far. They have outpaced consensus estimates by 3.8%, and only 7% have missed estimates, according to data from Morgan Stanley.

But share prices of those that have fallen short of estimates have taken a severe beating. Given the fragile sentiment a few more prominent misses could derail the market.

“The market is punishing these misses more than it is rewarding beats, an asymmetry we have been calling for and we forecast will continue,” wrote Morgan Stanley’s US equity strategist in a note to clients.

“Our view remains that first half of the year numbers are achievable but the second half of the year looks challenged,” he said.

Next week is also a big week for economic data. Fears of a slowdown in the economy have been a large driver of market volatility over the last few months, and the coming releases will be parsed very closely.

They include early regional manufacturing data from Chicago and New York, a reading of consumer sentiment, and a first reading of US growth for the second quarter, expected to show the economy grew just 1.9% in the period.

Bob Doll, chief equity strategist at Blackrock, one of the world’s largest fund managers with around USD 1.6 trillion of equities under management, said this week that the US economy is at a critical juncture.

Doll points out that since 1960 every time year-on-year growth has fallen under 2% the US economy has gone into recession.

“Our bottom line view is that investors should maintain a reasonably constructive bias toward risk assets, but should also be prepared to scale back exposure if evidence of economic growth acceleration does not materialize.”

Always Yours — As Usual —- Saurabh Singh

Note: Compiled from published News and Views

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