Food Inflation in 2009

The post below first appeared on http://www.birdinfo.net on 28th Nov 2009 when the Dubai was in news for being under pressure of real estate related defaults and the world was worried but I was of the opinion that it should prove to be a passing phase without global or permanent implications. There are few other points raised which after passage of more than two years become interesting to read and ponder :

Highly priced Real Estate not secured any where

Friends,

The Friday trading was very volatile and for wrong reasons. There is some talk of problem in Dubai and a big group has asked for moratorium on payments towards servicing of the loan. The size of the loan in problem is about $60 to 80 bn. This is hardly any thing that should unnerve the markets in Asia and Europe. It is simply this that when there was a lot of lend-able capital in hands of banks, it was finding way into hands of real estate developers around the world. It was because real estate was supposed to be providing a sort of stable security which would not diminish much in value unlike in case of a business enterprise ownership which may wipe out every thing if losses persist.

This false sense of security was misplaced because the real estate is good as security but only when its not priced way high than it has historically been. It made lenders in USA pay heavily and would make them suffer else where if the benchmark price while lending is taken to be high enough. India’s banks like HDFC have not had such problem for last forty years because the real estate prices were never accepted worth more then 80% of the prices quoting in market. Further underpricing of the deals for saving on stamp duty and use of unaccounted cash has been quite fashionable. These practices have saved the day for the Indian banks.

Let us put behind the Dubai issue and concentrate on investing as some very good moves are going to show up considering the corporate earnings, interest rate scenario and money supply situation. Some of our corporates may have some exposure in Dubai but every thing is not going to come to an end and also the Govt there will come for rescue with the help of oil dollars which need also some where to go. Why not nearer than far.

The Food Price index has shown 15% appreciation. Now, again if we consider as some thing detrimental for the market, we will be on wrong track. It agricultural commodities are high in price, the rural communities will be have more buying power and this is what is the real impetus to our Steel, Cement, FMCG, Auto, Pharma and Telecom sectors.

The wages get revised and pinches no body. There is no gain in saying that this situation is bad for the retired people but as the poor do not live much beyond the average life in any case and the affluent have more then required savings stashed away, the problem of high food prices is only a passing discomfort. There is also a point that we Indians do not hold financial assets only and diversify our savings in to property and bullion as an equal choice.

High food prices also will enable us to use the land asset more intensively and invest in modernizing agriculture. It will also make govt see value in implementing irrigation projects fast and water management will be a priority. The marginal farmers will strive hard to become surplus farmers and this will spur a lot of financial and commercial activity. The cold chain will be affordable. Every development due to it is a positive for India.

Hari Om,
Krsna Khandelwal

One thought on “Food Inflation in 2009

  1. Pingback: » Debunking the food crisis

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