#1: Douglas Adams and Indian farms

Poor farmers, crypto as currency, and quirky returns from IPOs

Nov 21, 2021

Agriculture by the Numbers

42, according to Douglas Adams, is “The meaning of life, the Universe, and Everything?”

42% is also the single most important statistic in Indian agriculture, the percentage of the Indian labour force employed on farms. Advanced nations now have that number down to 2 or 3%. In England, home to the Industrial Revolution, the share of labour in agriculture was already down to 32% by 1800.

This number is important because manufacturing is much more productive than agriculture, and factory jobs pay much more than farm labour. The same is true of services, though they span a wide range of occupations, from the village barber to the IT professional. As people move from the farm to the city, the land per rural inhabitant goes up, farms become more mechanised, productivity goes up, and so does agricultural income. In contrast, our farms are small, poorly mechanised, and yield much lower crops per unit of land.

In 2019, a National Sample Survey concluded that the average rural household in India made only Rs. 3798 per month from its crops. Wage labour, at Rs. 4063, contributed more. At 5 family members per household, crop cultivation brings in Rs. 25 per capita per day, which is about 70% below the poverty line. Indian agriculture is in dire straits, and needs drastic reform.

Agricultural incomes vary widely from one Indian state to another. Punjab farmers do much better than those in Bihar, both because they have higher land holdings, and because the Food Corporation of India (FCI) buys wheat and rice from them at guaranteed prices - the MSP or Minimum Support Price. These farmers suspected that the new farm laws, which the Prime Minister backed off from on Friday 18th, would also do away with the MSP. With the most to lose, no wonder they were the backbone of the farmer protests.

One of the new farm laws intended that farmers would no longer have to sell their crops to APMCs (Agricultural Produce Market Committees). To advocates of free markets, like myself, this would seem to be a good thing - farmers can sell to the best bidder, rather than to a closed circle of APMC traders. Bihar did away with the APMC Act in 2006. Research by the NCAER (National Center for Applied Economic Research ) and the University of Pennsylvania showed that, as a result, the number of agricultural markets dropped, farmer income dropped, and farmers living far from markets suffered the most. Reality proved to be quite different from what I would have expected. In other states, with large crop outputs, the outcome could quite well be different.

This leads me to two conclusions. The first is that agricultural marketing policy must be carefully crafted, taking into account climate, land holdings and cropping patterns in each region. This is exactly what was envisaged by the constitution, which gave individual states the responsibility for agricultural laws. The ham-handed way in which this government tried to railroad agricultural reform laws at the national level was a disaster, in both policy, and legislative terms. I suspect the political fallout of this mess is going to set back agricultural reform in India by a decade.

More importantly, I don’t see any way in which farming can support nearly half of India’s population at a respectable level of income and consumption. In the 1980s, the World Bank had said of Indian agriculture that its prosperity depended on the growth of jobs outside of agriculture.

The magic number for the Universe may well be 42, but for Indian agriculture, it's probably more like 24.

Crypto: Currencies, or not?

Regulation for crypto-currencies will probably be legislated in the next parliament session.

Indian papers report that the laws will allow crypto-currencies to be used as assets, but not as currency. Meaning, you can speculate in Bitcoin, but you can't put it to use.

In the 90s, Arun Mehta, an early internet adopter and evangelist, was trying to convince me that a computer not connected to the net was a dumb machine. He told me this fable:

Two forest dwellers in Africa chance upon a large metal structure in a clearing. It has glass panes on all sides, and sits on 4 large rubber rings. Like the blind men and the elephant, they poke around trying to figure out what it is. One manages to open a door, and declares that the seats are really comfortable.

"It's a place to rest in."

His friend has climbed into the back seat.

"You can even sleep here"

"When it's cold outside, you can keep warm."

"And dry - if it rains."

"When it's warm, you can let the air pass through"

"What a wondrous creation."

The man in the front seat hits the horn by mistake, and jumps. Then he realises he can make the sound again.

" There's even a trumpet to keep the animals away."

To the uninformed, cars are not for driving. And crypto is not for payment.

A Tale of 2 IPOs

Nykaa and PayTM are both wildly successful enterprises; a celebration of Indian entrepreneurship, and the start-up eco-system.

At Thursday’s closing price, they both have a market cap of just over 100,000 cr., which would put them just ahead of Hindalco and SBI Cards, and just behind Bajaj Auto and DLF. DLF defined real estate development in Delhi and the NCR, and was founded in 1946, 75 years ago. The other 3 belong to even older business groups.

By any standards, Nykaa and PayTM’s leap into the big league has been phenomenal. The recent IPOs (Initial Public Offering) of these shares offered the investing public a chance to participate in their success.

A friend e-mailed to ask if she should subscribe to PayTM, as “many people are advising me to”. I said I wouldn’t, because I couldn’t even begin to understand PayTM’s business model, meaning how they plan to make a profit. A flurry of e-mails between us followed, and the FOMO (Fear of Missing Out) around the IPO party leapt off my screen - much of which came from the roaring debut of Nykaa earlier in November.

I didn’t subscribe to either of the two IPOs, as I thought they were both over-priced.

The stock market completely disagreed with me about Nykaa, and on the day it was first traded, it gained almost 100%. PayTM, on the other hand, lost 27%. If I had subscribed to both, a huge net gain?

Not quite. The Nykaa IPO was hugely over-subscribed, and you only got a percentage of the shares you applied for, the exact number depending on the category - Institutional, retail, or High Networth Individual (HNI). Though the percentage gain on the shares you got was huge, the gain on your outlay was less impressive. In the case of PayTM, you got a much higher percentage of the shares you applied for, and the loss on your outlay, though ‘only 27%’, was a large absolute number.

If you had put aside a kitty of 2 lakhs for each IPO, this is how the profit and loss would have stacked up: