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Currency Trade: War or Peace?

February 1, 2013 1 comment

Now that Japan has joined the currency devaluation game, it leaves the Euro twisting in the winds of currency storms.

The yen, trading at about 87 per dollar, has shed about 11 percent since mid-November when Shinzo Abe, who became Japan's new prime minister following elections last month, promised a more aggressive monetary policy.  |  Graphic source & courtesy - cnbc.com

The yen, trading at about 87 per dollar, has shed about 11 percent since mid-November when Shinzo Abe, who became Japan’s new prime minister following elections last month, promised a more aggressive monetary policy. | Graphic source & courtesy – cnbc.com

Given a choice between a Japanese car and Chinese, almost any car buyer in the world will opt for a Japanese brand.

If price difference is small.

But as we know the price difference between Japanese and Chinese cars (and other products also) is rather big.

How the Yen has become expensive. From nearly 290 yen:1 USD to 80 yen:1 USD  |  Graphic credit - wsj.net

How the Yen has become expensive. From nearly 290 yen:1 USD to 80 yen:1 USD | Graphic credit – wsj.net

The big reason for this price difference?

The Japan Case

Though not the only reason, the high cost of the Japanese Yen after the Plaza Accord (September 22, 1985) has painted the Japanese economy into a corner.

Japan on Thursday reported a record annual trade deficit in 2012, the second straight year in the red for an exporting nation that has long built its wealth on its vast trading surpluses.

The annual trade gap of 6.93 trillion yen (about $78 billion) was brought about by surging fuel imports and a continued slide in machinery shipments and other mainstay exports. The deficit underscores the challenges Prime Minister Shinzo Abe faces as he tries to lift the world’s third-largest economy out of years of stagnation.

The deficit also brings to the forefront the risks that accompany Mr. Abe’s bid to revive the economy through government spending, which will add to Japan’s public debt, already more than twice the size of its economy. For years, export surpluses helped Japan finance that enormous debt without having to turn to foreign investors.

But that delicate balance is now unraveling. The global economic crisis set off a fall in Japanese exports, and also caused the yen to strengthen, weighing on the country’s competitiveness and recovery. The prolonged shuttering of the country’s nuclear reactors in the wake of the Fukushima crisis has led to a spike in Japan’s imports of oil and gas. A bitter territorial spat with China has hurt exports to Japan’s biggest trading partner.

The provisional data released by the Finance Ministry on Thursday showed exports continued to fall in December at a faster pace than forecast by economists, despite a weakening of the yen that should have come as a boon to exporters.

According to the data, Japan’s annual trade deficit jumped by 170 percent from the 2.56 trillion yen shortfall it recorded in 2011 to 6.93 trillion yen. Energy imports, mainly from the Middle East, surged, machinery and car exports fell across the board. By region, Japan’s exports to China tumbled by 10.8 percent, leaving Japan with a trade deficit of 3.52 trillion yen (about $40 billion) with its rising neighbor. Exports to the struggling European Union also fell by 15 percent.

Trade with the United States was brisk, however, with exports climbing 11.7 percent and imports by 2.5 percent for a 5.1 trillion yen (about $58 billion) surplus. Japanese automakers did particularly well in the United States last year, rebounding from production cuts brought about by Japan’s 2011 tsunami.

via Japan Reports a $78 Billion Trade Deficit for 2012 – NYTimes.com.

BoJ's asset-purchase program has trailed other big central banks  |  Graphic source & courtesy - economist.com

BoJ’s asset-purchase program has trailed other big central banks | Graphic source & courtesy – economist.com

The expensive Yen has increased the price of Japanese exports. Decreasing export-growth due to an expensive Yen, has led to a 20-year economic stagnation-deflation situation in Japan – now referred to as Japan’s Lost Decades (失われた10年 Ushinawareta Jūnen).

Could Japan’s actions to depreciate the Yen have been unilateral?

Highly unlikely.

Japan is the latest country to say enough is enough. Having seen its currency appreciate dramatically in recent years, prime minister Shinzo Abe’s new government is taking steps to alter the country’s exchange-rate dynamic – and is succeeding. In just over two months, the yen has weakened by more than 10% against the dollar and close to 20% against the euro.

via Currency war could cause lasting damage to world economy | Business | guardian.co.uk.

Japan’s new government has vowed to revive the economy and expectations for aggressive monetary easing are running high. This sets the scene for the yen to weaken to the 100-mark versus the dollar.

The yen, trading at about 87 per dollar, has shed about 11 percent since mid-November when Shinzo Abe became Japan’s new prime minister last month, promised a more aggressive monetary policy.

Keen to tackle the deflation that has dogged Japan’s economy for years, “The yen has fallen quickly and once it gets going, it gets going. What kind of number (in dollar/yen) do you need to fight deflation? I think we need to see dollar/yen at 110, 20 to say you’re on top of the deflation problem,” Jerram added.

Inflation in Japan fell 0.2 percent in November from a year earlier, after a 0.4 percent decline in October. A weak currency, brought about by aggressive monetary easing would help boost inflation, analysts say.

Japan’s current account surplus fell 29.4 percent in October from a year earlier to 376.9 billion yen ($4.58 billion) on a fall in exports.

They say another reason to expect further yen weakness this year is a brighter outlook for the global economy, which means there is more incentive for Japanese investors to put their money overseas.

“Everything is in place for a move in dollar/yen to 100, the only constraint being resistance from other major central banks to anyone else adopting a weak currency,” Societe Generale said.

via Picture This: The dollar at 100 Yen.

The Chinese Knot

A cheaper Japanese Yen affects China the most.

Any major currency appreciation, devaluation in the last 60-years has happened under the (what 2ndlook calls) USCAP system.

So, the noises being made of currency wars by Germany is probably to quieten other claims for currency depreciation – like Korea, Euro zone, Taiwan, Asian Tigers, et al.

Decreasing exports, incomes coupled with high production capacities has put Japan on the path of deflationary spiral.  |  Graphic credits embedded.

Decreasing exports, incomes coupled with high production capacities has put Japan on the path of deflationary spiral. | Graphic credits embedded.

China seeks to replace the former Soviet Russia as the challenger to Pax Americana. This challenge by China to Pax Americana is based on manufacturing prowess and huge foreign currency reserves.

China’s Yuan has already appreciated to a 20-year high. In the current global scenario, China’s currency situation puts it in a weak situation. China’s economic engines will seize, if the Japanese Yen were to depreciate to ¥110-120.

EU’s Sports Complex

The interesting point is how EU manages its trade deficit. Without blaming China-Yuan.

EU-zone countries like Greece, Ireland, Italy, Portugal, Spain, are on the verge of a sovereign default. Euro-zone is upto its gills in debt. The Euro is being called names. And EU is not snivelling about the Yuan and China?

Very un-European!

USA, EU Trade Balance with Oil Producers (Graphic source and courtesy - www.eurotrib.com). Click for larger image.

USA, EU Trade Balance with Oil Producers (Graphic source and courtesy – http://www.eurotrib.com). Click for larger image.

Usually…

Europe is at the forefront seeing dangers, damage, affronts, threats, effects, fall-outs et al.

The whole she-bang!

But in case of China and Yuan, Europe is not doing much of crying about the ‘undervalued’ Yuan. The Euro revaluation from USD 1.6 four years ago to USD 1.25 now is a recent affair.

So, not of much consequence. The Yuan undervaluation has been on the US agenda for a few years now – with varying intensities. Euro-trade balance with China is slightly in China’s favour. All in all, good management by the Euro-zone, it appears.

Which in the current scenario is the one-bright-spot on the Euro-horizon!

In today’s world, no significant group of countries is looking for currency strength. Some resist appreciation actively and openly; others do so in a less visible manner. Only the eurozone seems to accept being on the receiving end of other countries’ actions.

via Currency war could cause lasting damage to world economy | Business | guardian.co.uk.

The German Footprint

Behind the Euro-zone is the Germanic template.

In the last twenty years, Germany has absorbed East Germany, without a hiccup. During the same period Japan entered into a deep stagnation-deflation phase – but not Germany. While the world succumbed to Chinese manufacturing onslaught, the German industrial complex kept humming - steadily. While the US economy stumbled from bankruptcy of the auto-industry to the dotcom bust and is now deep into the housing crisis, the German economy remained stable.

All this without seeking competitive currency devaluation.

countries nowadays, including systemically important ones, are already actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy.

via Currency war could cause lasting damage to world economy | Business | guardian.co.uk.

Wars Before The War

WWII was preceded by 15-years (1921-1936) of currency devaluations. Will history repeat? Will the US take a break after ending the Afghan War in 2014 to start WWIII?


Of Mice and Men – 2015 Gold Outlook

USA, EU traderelationships with oil producers. The European hands-on, micro-management issue of trade balance seems to be delivering? Some may question, what it is delivering, though.

USA, EU trade relationships with oil producers. The European hands-on, micro-management issue of trade balance seems to be delivering? Some may question, what it is delivering, though.

Of mice and men

While the US dollar is weakening, by design, Greece, Ireland, Portugal and Spain are being bankrupted by a deliberately overvalued Euro.

In such a scenario, China believes that it has a winning hand. Even though, the Chinese exports juggernaut has been slowed by a yuan, trading at 17 year-highs. March 2011 reports indicate

an unexpected $7.3 billion trade deficit, the biggest in seven years. The nation’s (China’s) exports rose at the slowest pace since November 2009.

The US is betting that a weak dollar will reignite economic growth – much like what happened after the Japanese Yen strengthened due to Plaza Accord (1985).

For Europe, the grand prix is to replace the dollar as the currency of international trade – especially oil trade. Euro as a international trade-currency-of-choice, will give the Euro region access to more than 1 trillion euros in zero-cost floating balances.

China is expecting the yuan to play a similar role. Such are plans made by mice and men.

Monsieur Murphy says

What can go wrong with these plans? Plenty.

The eternal enemy of currency manipulation – gold. As a million bureaucrats work on the mechanics of their plans,

Increasingly, everyone is a victim - except the powerful 0.5% elite that rules the world. Break their power. Buy gold. (Cartoonist - Ted Rall; courtesy - http://charlesgoyette.com). Click for larger image.

Increasingly, everyone is a victim - except the powerful 0.5% elite that rules the world. Break their power. Buy gold. (Cartoonist - Ted Rall; courtesy - http://charlesgoyette.com). Click for larger image.

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010. (via Gold Coins Show Bull Market Unbowed in Commodities Decline – Bloomberg).

You take free advice …?

While George Soros talks of gold being the ultimate bubble, his companies are quietly buying gold.

Back in late January, as the world’s important people rubbed elbows in Davos, billionaire investor George Soros had some rather definitive thoughts to offer on gold, which he called “the ultimate asset bubble,” according to reports.

However, he neglected to mention that his hedge fund had been buying.

Another report points out that the liquidation (by people like Soros) of investments in public investment vehicles may be replaced by private investments.

In this game of musical chairs, when the music stops, everyone who does not own gold is out. (Cartoon by David Horsey; Courtesy - http://politicalhumor.about.com). Click for larger image.

In this game of musical chairs, when the music stops, everyone who does not own gold is out. (Cartoon by David Horsey; Courtesy - http://politicalhumor.about.com). Click for larger image.

The new filings from funds “may show that big names exited ETPs and this news may cause prices to slip in the very short term,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. Some funds switched to holding gold directly so they wouldn’t have to announce it publicly, he said.

Is gold a bubble?

A rather disbelieving journalist writes of the situation in the West

Gold is in a bubble. Anyone will tell you that. They’ve been saying it since gold was about, oh, $500 an ounce. But it’s a funny kind of a bubble. It’s the only one I’ve encountered where so few people seem to own the asset in question.

During the dot-com bubble, you met lots of people with tech stocks. Taxi drivers told you what dot-coms they owned. During the housing bubble you met normal, ordinary people who were trading up to expensive homes using adjustable-rate mortgages, buying new condos off plan to flip, and cashing out their fictional “equity” through a refinance mortgage.

But who actually owns gold? I keep hearing about the gold bubble, but every time I ask people if they own any themselves, they say, “no, no, of course not, it’s a bubble.”

Some bubble.

Central banks around the world are printing more dollars, euros, pounds and yen. Gold may simply be a less awful currency than all the others. Banks can’t print any more of it, so its price should probably rise while other currencies fall.

For this year, the question in India seems to be, “Will gold cross Rs.25000, by 2011 Diwali?”

The dangerous case of the Chinese stumper

The dollar and euro need to be devalued by 25%-50% which means yuan must appreciate another 20%-35% from it record high (update on 26th August, 2011)

Let us call this the Chinese Stumper! (Hambone by Mike Flanagan; Cartoon courtesy - Business Standard; from issue dated 19th May 2010; Copyright - Graphic Syndication, England).

Let us call this the Chinese Stumper! (Hambone by Mike Flanagan; Cartoon courtesy - Business Standard; from issue dated 19th May 2010; Copyright - Graphic Syndication, England).

Siamese’ triplets

The Great Recession is like a case of conjoined triplets.

One is the USA – who has used their Bretton Woods licence to print dollars and flood the world market with excess liquidity. The US has also used their ‘dollar power’ to gain loyalty by favouring their allies, satellites and client states with low exchange rates that boost exports. Europe, Japan, Asian Tigers, (and now) China have all been favored with a ‘beneficial’ exchange rate in the past. At an ‘appropriate’ time, this ‘benefit’ was taken away. The US gained by ‘recruiting’ low-cost labour of these economies.

The US 'out-thunk' the Euro-zone on the Euro-currency strategy!

The US 'out-thunk' the Euro-zone on the Euro-currency strategy!

US imports, were underwritten by an increasing volume of IOUs, denominated in depreciating dollars. By paying for imports with IOU notes, the US could subsidize their high-cost exports, to these ‘semi-captive’ markets.

With dollar IOUs and dollar liquidity, US funded hi-tech R&D, overseas acquisitions (of companies, raw materials, allies), commercialize new technologies and standards (internet, software) space and defense, et al. Last forty-year estimates, show that US obtained funding equal to one full year’s US GDP. At nil cost!

All this due to the US dollar’s reserve currency status!

Can Europe be far behind

The Euro unwinds!

The Euro unwinds!

Post-Plaza Accord, Europe decided to get into ‘reserve-currency’ game, with the launch of the Euro currency in Jan 2002. As an incentive to TT-Note holders, the ECB ‘allowed’ the Euro to appreciate – vis-à-vis the dollar. This gave windfall gains to countries holding Euro as a reserve currency.

From dollar parity in 2002, the EU appreciated by more than 60%. After the introduction of Euro, in the first six years, Euro-bond holders hit a gusher. Anyone who held Euro bonds from January 2002 upto Decemeber 2007, would have made some 80% return during this six years. A return of 15% per annum. Close to junk bond returns.

After the ECB took the bait, the US played a waiting game. After running with the overvaluation bait, for 8 years, the Euro- fish is now tired. It is not able to break free of the over-valuation hook. The US is now reeling in the fish.

With a ‘strong’ currency, the option for Euro-zone is massive and painful deflation. Wages, pensions, prices, welfare state benefits will need to come down – and drastically. Do they have the steel or the hunger to do this. Used to a gold-plated Welfare State, Euro-zone does not have the moral resolve to go on a cold turkey diet of frugality.

500 years ago, a poor and marginal Europe could take the risk – and inflict genocide, slaughter, war, crime on a hapless world. Today’s geriatric Europe, effete and crumbling, cannot repeat their run of ‘success’, confronted as it is, by a militarily prepared Asia. Modern Europe’s problem is compounded by the lack of availability of victims.

Which brings us to China.

Change in US Govt securities by China - which has ranged between 30%-60% of total reserves. (Image source and courtesy - http://usa.chinadaily.com.cn). Click for larger image.

Change in US Govt securities by China - which has ranged between 30%-60% of total reserves. (Image source and courtesy - http://usa.chinadaily.com.cn). Click for larger image.

Doing business with bankrupt customers

China’s currency reserves of some US$2.5 trillion, (Update – US$ 3.2 trillion August 2011) in rapidly depreciating Euros and dollars with manufacturing overcapacity, exports-growth economic model is building into a complicated pressure head. Waiting to blow up. Already under US pressure for a yuan revaluation, add complications like

  1. Empty building blocks combined with inflated real-estate prices
  2. Bloated banks loan ledgers with ballooning bad debts
  3. Low entrepreneurial levels with foreign ownership of Chinese businesses
  4. Aging population with a dominant public sector
  5. Increasing foreign exchange reserves of depreciating currencies

and the Chinese Growth story begins to sputter.

As for the Rest of the world

The real challenge for the rest of the world, will be, one, wealth protection. Easily done. Buy gold.

Two, how do we let events unfold – safely. Insulating ourselves from the cycle of calamity, catastrophe, chaos, confrontation, confusion, crises – and then finally a crash.

A cycle that a 86-year young, mentally active, Gujju stock-broker, in Mumbai, shivering with Parkinson’s, explained to me, a few days ago.

The looming Yuan-Dollar currency crisis

No dearth of pretenders - EU, Japan ... and now China!

No dearth of pretenders - EU, Japan ... and now China!

There are three separate reasons for this … The reasons refer to the broad determinants of economic growth — capital, labour and productivity.

On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years).

Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world.

For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level. (via Surjit S Bhalla: India’s Shining Decade).

Plausible! Probable … Possible?

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

Surjit Bhalla outlines a plausible scenario – with China needing to adjusting their exchange rate upwards – much like other US client-states had to! Europe had to in the 70s, Japan in the 90s, Asian Tigers in last 10 years. As examined earlier in some detail by 2ndlook. One question is settled. There will be economic mayhem.

However, Bhalla assumes that the Dollar-Yuan revaluation will happen smoothly – without any significant disruption. And that is one, big, huge assumption – which is based on really, really slippery slope.

Bhalla would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.

The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.

What will it be this time?

The approaching mayhem

The next few years will be tumultuous for China.

Much like, when Europe was weaned off the low exchange rate crutch in 1967-1974 period. Stagflation, oil shock, the Nixon Chop followed. How Japan had to live with endaka, the Plaza accord, with S&L crisis in the US.  Or the Asian Tigers had to reset to a higher exchange rate and higher foreign reserves, that accompanied the 1997 (Asian Crisis) to 2000 (The Tech meltdown).

What will follow the Chinese moment in the sun? What will set off economic mayhem in China?

Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario), dollar-yuan exchange ratio (significant risk)?

Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!

Signs of coming troubles?

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

When the Soviet Union imploded, one of the unexpected fall out was the Russian mafia. Recent troubles in China, with the underworld creates a spectre of yet another mafia creating global disturbances. One more element in global trouble spots. To understand this better, turn to Chinese cinema.

Most films that have any Chinese element in it, (actors, directors, characters, locations) end up having the Chinese underworld as an important part of the storyline. Is it that the Chinese are morbidly fascinated by criminals and the underworld – much like Europe was with English pirates and murdering Spanish Conquistadors.

Ranging from Jet Li in Kiss of the Dragon, (Jet Li takes on the French mafia) or Chow Yun-Fat in The Corrupter (exposing police-underworld nexus and corruption in the USA), or Jackie Chan in Rush Hour series or the Chinese Ric Young in The Transporter, Jet Li in Lethal Weapon 4.

All have two elements in common.One is the pervasive Chinese underworld. Across Europe, in the USA. In drugs, fake currency, in smuggling boat people, the Chinese are there – everywhere. Many of these movies have Chinese stars, directed by Chinese directors or even partly funded by Chinese studios .

The second is the absence of the Buddhist monk.

India – the loose cannon!

What kind of ending will we see ...?

What kind of ending will we see ...?

Now, India is one box which defies description. By any global and historical standards, the country should not even exist – much less prosper, or be a significant global player. Too many languages, too much poverty, too much freedom, too many political parties, too many languages, too many religions, too many racial types are the common factors going against India (so goes the Desert Bloc narrative).

In such a situation, even in India, for the Westernized types or the remnants of the Desert Bloc admirers, India remains a failure waiting to happen.

Unfortunately, for these doubting Cassandra’s, India has proven them wrong for more than 5000 years now!

equally

Radically rethinking Indian agriculture – Sanjeev Sanyal

July 9, 2009 7 comments

In recent weeks, there have been growing apprehensions that the monsoons of 2009 will fall short of normal. This has again raised fears of rising food prices, collapse in rural incomes and possibly farmer suicides. Many a tear will be shed for rural India. Predictably, there will calls for greater support for the agriculture sector in the form of subsidised fertilisers/pesticides, cheap electricity for pumping ground water and farm loan waivers. We have been doing this now for generations now and our impoverished farmers still commit suicide. Surely, it’s time to rethink this strategy. (via Sanjeev Sanyal: Radically rethinking agriculture).

The Good …

Sanjeev Sanyal’s article does raise some interesting points – and usual points. After a promising start he then loses his way half way through.

He demolishes the idea that “the route to prosperity in rural India lies in accelerating farm production. Agriculture … contributes 16.5 per cent of the economy … great exertion … cannot … (make it) grow much more than 3 per cent per annum on a sustained basis (when the rest of the economy routinely does 7-8 per cent).”

He correctly points out that “India … produces enough food to feed itself but … 20 per cent of output is wasted (a) problem … of distribution and storage, (and with) population growth is now 1.6 per cent per year … we need to grow production by no more than this rate. … we should … slow agricultural growth … if we do not want … greater wastage or a structural price decline …a buffer for drought years … is better management of bumper crops rather than ever more production. India should shift focus from increasing agricultural production to improving its efficiency (with) investment(s) … in storage and distribution.”

His best one is the warning that “farming comes with a large environmental cost … the Green Revolution is anything but “green”. Current farming techniques are severely damaging to the environment through the depletion of ground water, conversion of forest land and over-use of pesticides, fertilisers and other chemicals … sacrificing the long-term viability of the farm sector. It … made sense in the ‘70s to force a level-shift in food-grain production but why should we be still sacrificing the food security of future generations?”

He reminds us that “it makes … sense to strictly conserve ground water and use it only when the monsoons fail. Special attention should be given to water management (as opposed to extraction). Agriculture consumes 80 per cent of the country’s fresh-water in order to produce just 16.5 per cent of GDP … poor use of a scarce resource.”

The Bad …

Do we need this Great American Dream

Do we need this "Great American Dream"

After such good work, he succumbs to the banal – with some usual conclusions. He thinks that,

very large investments in water systems are needed to maintain even the current growth path.

Large investments in water systems are a bad, imported idea. India’s successful water management model is the nearly local 500,000 water bodies – ponds, lakes, anicuts, barrages, bunds, talabs, bawlees, wells. These water bodies stored surface water – and sustained Indian agriculture for the last 2000 years. Post-colonial India’s quest for Nehruvian “temples of modern India” spurred huge and wasteful investment in large hydro-electric dams. Reviving Indian water systems and rivers will take some 10 years and Rs.25,000 crores. About the cost of two large dams.

With around 70 per cent of the population still in the villages, it is absurd to hope that such a small and slow-growing part of the economy can bring salvation to such a large population.

US agricultural subsidies

US agricultural subsidies

Mr.Sanyal, you should consider the following, before you make such a sweeping statement. With the declining power and use of the dollar, the US is fighting a losing battle against agricultural subsidies. The US depends on less than 50,000 corporate ‘farmers’ for 50% of ts production. These corporate ‘farmers’ will abandon agriculture at the first sign of reduced subsidies. Over the next 20-30 years, this leaves India (and Russia) to cater to global food shortfalls. The Western industrial model is in its sunset phase. The Indian agricultural model can be the big winner in the next few decades – under the right stewardship.

And in the meantime, he himself follows up with an observation, “studies by economists like Dipankar Gupta suggest, non-agricultural activity already accounts for around half of rural India’s economy and provides employment to 35-45 per cent of the rural workforce.”

Third, encouraging agricultural growth for exports in not a viable option for India. Export of agricultural products is tantamount to export of water. International trade may make sense for some niche products like tea or for managing natural cycles in food-stocks. However, it cannot be a central strategy for a water-starved country like India. It is especially careless to be thinking about exporting water when climate change may be putting even current supplies at risk.

As pointed out earlier, both water management and agricultural exports is something that is both feasible and sensible thing to do. This is something that India must prepare itself for.

The truly ugly

Meanwhile, policies should be aimed at encouraging the process of moving the rural economy away from agriculture.

Broke ... and Broke

Broke ... and Broke

The Ikshavaku clan, (of Ramchandra in the Ramayana fame), became a ruling family for developing the agricultural strain of sugarcane. Bhagwan Krishna came to be known as Natho, for domesticating wild bulls. Balarama is the 7th avataar of Vishnu - whose ‘weapon’ was the plough – the founder of Indian agricultural practice.

The Indian agriculturist has made a remarkable recovery after the colonial collapse – and he may still surprise you.

The aspirations of rural India have already shifted — the literate children of subsistence farmers want real jobs, not pesticides. Why should we stop them? However, this requires a big shift in policy mindset. For instance, we need to shift from a regime of cheap but irregular power supply (which may work for irrigation) to one that is fully-priced but regular (necessary for the non-farm sector). This is our best bet for making India drought-resistant.

After ceaseless bombardment of advertising, with Indian languages weakening due to massive Government subsidies to English language education, is the movement to urban lifestyle a surprise? Not to me Mr.Sanyal. Though, why you are surprised, Mr.Sanyal is a puzzle to me. We need to invest in rural India. Currently rural credit is way below its contribution to GDP – and the low price realizations for agricultural output makes the case for investments stronger.

Next, we need to revisit general governance in rural India. The traditional structures may have worked for subsistence farming (even this is debatable) but they will not support large investments in industry, construction and services. The government needs to focus on how to deliver policing, enforcement of contracts, property rights and so on.

This is about shifting from a world of farm-loan waivers to one that can support large-scale mobilisation and investment of capital in these areas. The Naxalite movement that affects a fourth of India is not due to the failure of agriculture but the failure of governance. At the same time, note that the cause of property rights and governance is not served by the indiscriminate use of “eminent domain” to acquire large chunks of land for so-called SEZs.

Do we need this American model?

Do we need this American model?

When you refer to ‘traditional structures’, are you talking about ‘general governance’ of the colonial Raj – that post-colonial India continued with? Or are you talking about the pre-Raj structures? The Indian peasant was the first and the only peasant in the world to own his property – till ‘Desert Bloc’ rulers started a 800 year trend of ‘landgrab’. Yes. India does need to re-visit ‘general governance’! We need traditional governance – and not the ‘modern’ colonial baggage, that India has not discarded.

We need to give back the lands that were grabbed from the poor Indian peasant and the poor Indian tribal.

The need is for a framework of governance that allows industry and services to grow organically in response to local conditions.

Finally, there should be a greater effort to provide urban amenities for education, health, shopping and leisure at places that are accessible to the rural hinterland. Together with the shift to non-farm jobs, this provision of amenities will inevitably lead to urbanisation. This is a good thing and should be encouraged. However, urbanisation is not just about migration to the mega-cities of Delhi and Mumbai … mofussil towns need to be revived as social and economic hubs

Indian agriculture has a great future – and don’t you ignore it, Mr.Sanyal. On the other hand, industrial over-production, debt-financed over-consumption, American economic model, funded by petro-dollars /Sino-dollars, is about to end.

India cannot go down that path.

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