Anjani Sinha’s views in his article, “Farm to fork at the right price”, Mint, 31 May, is correct, to an extent. True, farmers are often squeezed by middlemen, and at times by multinationals, too. They offer free seeds, finance the crop and then pre-determine prices for procurement. But a national electronic exchange may not be the solution. It can have many side effects. Farmers may get a better price but auctions, where players come from all over the country, will push prices to very high levels and put the basic agri-commodities out of reach for the common man. Enforcing stricter norms on commission agents would give better results.
This is with reference to Eswar S. Prasad’s article, “‘Shock’ will be the right tonic”, Mint, 30 May. I have the following observations:
On the face of it, and from within the country, capital account convertibility appears to have valuable benefits, both in a direct and indirect manner, as outlined by the author. These are, indeed, plausible arguments. However, I wish to draw your attention to the major imbalance in the amount of capital that is on the prowl, globally, and the depth of Indian markets— across public equity, real estate, private equity and debt.
India’s market capitalization is barely touching $1 trillion now, and only a fraction of this is traded. Besides, the real estate market in India is only just waking up to organized functioning and financing. Private equity is new to India and Indian debt is synonymous with government securities.
This means Indian markets remain a small fraction of their global counterparts. In the case of public equity, Indian markets are no more than 2% of the global equity pool of $55 trillion—this becomes worse if one takes into account the comparison with floating equity alone.
Such imbalances mean that small variations in the India allocations of global investment pools will magnify amply in relation to the variations in domestic markets. For instance, a small reduction of 1% of the portfolio allocations to India may lead to a reduction of 20% of asset prices in India in a full capital account convertibility picture.
The participants in the domestic markets are therefore forced to match the risk appetite and, in fact, to some extent, the risk-free rate of global investors— both are premature adjustments not quite warranted in a yet-to-be-developed country like ours.
It is ironic that the same issue of Mint carries a comment by Hillary Clinton on the worries regarding foreigners owning more than 50% of the US government debt. This apparently is driven by the attractive yields on US securities which would have been higher by 1.5% (as per the article) if it were not for the Brazilian and Chinese reserves buying into US debt. A similar situation for India would mean that it becomes that much more difficult to manage interest rates.
The bottom line is that capital account convertibility is inevitable, but why not wait till we touch the size of 5% of the global market (in most relevant asset classes), whereby liquidity alone will not remain a major threat to the stability of domestic markets. Given the fact that we are growing second fastest globally, this may not be very far into the future— say, three to four years from now.