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High food prices around the world? Blame – at least in part – the investors who moved their money into commodities in the past five years, looking for better returns than they were getting from stocks and bonds. Wire money online to India with Xoom.com for as low as $4.99. Global investment funds saw the potential for profits in commodities outstripping those from the stock market, and from 2002 started diving into oil, followed by metals and then grains. This move was fueled by falling interest rates in major economies, which make fixed-income investments less attractive, and a weak dollar, which tends to drive up the price of dollar-denominated investments such as most grains. These in turn attracted investors with little or no connection to the grain market often labeled as speculators, who took corn, soybean and wheat prices to a whole new altitude. In March, corn futures hit a record $5.88 a bushel and, soybeans $15.86-3/4 on the Chicago Board of Trade, the benchmark for world prices. CBOT wheat peaked at $13.49-3/4 a bushel in February. Stung by high transportation costs from record oil prices, food makers have passed some of the high crop prices to consumers, leading to protests in many countries. Some nations have even withheld grain exports to guarantee domestic supply. Investors say high prices are supported by fundamental supply-and-demand factors like a higher protein diet in emerging economies like China, demand for bio-fuels made from corn, soybeans and palm oil, and drought in some important grain exporting nations. But investors bear at least some of the blame, economists say. The idea is there are a lot of new players in the commodities-futures game and those new players don’t necessarily have a vested interest in the market beyond the speculative interest. Although agricultural commodities trade on fundamentals like harvest reports, they have become more volatile due to the influx of new money. With speculation it means it tends to move much sharper than it did in the past. Unfortunately, when people are trading commodities, I don’t think they are even caring about social impact. What these people do is invest and their job is to make money. If they think something’s going to go higher, they are going to trade on it. They’re not going to be worried about repercussions somewhere else. As recession talk swirls in the United States, some say the outlook for stocks [...]

Spiraling food and commodity prices pushed the inflation rate to a worrisome 7 per cent and a concerned government, confronted with major supply constraints, threatened to come down heavily on hoarders. The latest price data released on Friday showed that the Wholesale Price Index (WPI) reached its highest since December 2004. Wire money online to India with Xoom.com for as low as $4.99. The rate of inflation in the previous week was 6.68 per cent and 6.54 per cent in the corresponding week a year-ago. Commerce and Industry Minister Kamal Nath warned that the government would come down heavily on those found to be involved in hoarding and profiteering. “We will not hesitate to take the strictest measures, including using legal provisions, against hoarding and profiteering, whether in food, cement or steel,” Nath said. The Centre has already empowered state governments to impose stock limit orders on essential commodities to check hoarding. Earlier this week, the government announced a slew of measures, including import duty cuts on edible oils and a ban on export of non-basmati rice. Experts cautioned that the price situation was unlikely to ease in the near future as a shortage of food had pervaded the world economy. Record prices of rice and sky-high oil have stirred up inflation worldwide, prompting many governments to impose price controls and curb exports of essential goods. In India, during the week ended March 22, prices of fruits and vegetables, pulses, cereals, eggs, meat, fish and edible oils went up, while condiments and spices were cheaper. The mineral category index shot up by 38.2 per cent, primarily driven by a 46 per cent rise in the prices of iron ore. Inflation is in an accelerating mode and we are yet to see any signs of its softening. While the government has taken some measures: I would not be surprised if the Reserve Bank of India (RBI) increases interest rates further. The RBI will announce its slack-season monetary policy this month and many analysts expect the central bank to raise interest rates to tame inflation. ICICI Bank Managing Director and Confederation of Indian Industry (CII) Vice-President K V Kamath felt India’s economy would continue to grow at a fast clip despite inflation. “The present inflationary spiral is a pure supply-side phenomenon and not due to overheating in the economy,” Kamath said. India’s gross domestic product (GDP) is estimated to grow at a [...]

The withdrawal of tax benefits for petroleum refineries, proposed in the budget, needs to be seen in the proper perspective. There is clearly no shortage of domestic refining capacity. There is much scope for exports of petro- products. In fact, petro-goods are now our biggest export item. Wire money online to India with Xoom.com for as low as $4.99.  But the idea that the exchequer needs to continue propping up export capacities with generous tax exemptions is thor0ughly questionable. Multi-year fiscal benefits for capital intensive oil refineries may well mean actual misallocation of resources and over-investment, in what remains a rather poor country.   That is why the move to do away with 100% income- tax holiday available on refinery profits, for seven years, as per Section 80 IE (9) of the I-T Act, makes ample sense. Reports say that at least three upcoming refinery projects, in Bhatinda, Bina and Paradeep, would be affected. But oil refineries need to be viable sans fiscal prop-ups. Also, proper project management and fast-forwarding completion schedules would likely shore up internal rates of return and make long-term tax breaks quite redundant.   There may still be a case for faster depredation benefits, to incentivize the setting up of world -class refineries. But blanket tax exemptions would be fiscally imprudent. We do need to do away with such tax breaks on the double-quick. That said, the proposed dropping of Sec 80 IB (9) tax benefits for exploration and production (E&P) as well, in the upstream oil and natural gas sector, needs to be promptly reconsidered. Given the high risks and uncertainties in E& P, continuing with the tax holiday seems unexceptionable. It could be argued that tax exemptions, across the board, do need to end. And that with crude oil at over $100 per barrel, it’s incentive enough to foray into E&P. But the fact is that over half our sedimentary basins remain essentially unexplored. Also, up to 10 billion tonnes of crude and a trillion cubic meters of gas are estimated to be in situ in Indian waters. With domestic crude output stagnant – actually declining – for years, we need a proactive policy to coagulate funds in the E& P sector. It would be for the greater good.    

SEBI’s primary market advisory committee is reportedly in favour of making underwriting mandatory for initial public offers (IPOs). This is an avoidable complication, and one which we have already experimented with in the past. It would further distract retail investors and may even give them false comfort. In the early 1990s, SEBI had introduced mandatory underwriting when IPO pricing was freed. But the concept was found wanting and mandatory underwriting was withdrawn in October 1994. Underwriting of IPOs is essentially a risk-mitigating mechanism, a kind of insurance. Wire money online to India with Xoom.com for as low as $4.99.     The issuer enters into an agreement with the underwriter(s) to take up the unsubscribed portion, if any, subject to some limits, of the IPO so that the issue sails through even if investor response is poor. In exchange, the issuer pays an underwriting fee to the underwriters. Therefore, while underwriting pushes up the issue costs, it provides a cover against under-subscription. Meanwhile, investors, supposedly, have comfort that the issue has the support of an informed market intermediary.     These intermediaries would also, because of the risk of devolvement, ensure better pricing. This may have been an important consideration in the early years of market reforms, but not any longer. The primary market now has large institutional participation and book-building ensures a better price discovery, though it has some shortcomings. Indeed, most retail investors look at the institutional subscription before applying for an IPO. In such a situation, underwriting is needed largely to cover under-subscription risks. Whether an issuer wants to cover the risk is best left to an individual issuer. Indeed, most IPOs do have some sort of underwriting arrangement. Besides, underwriting anyway is no guarantee that the issue would sail through. We saw some high profile issues withdrawn recently because the investor response was so poor that even after underwriters taking up their share, these IPO s would have failed. We have also had many instances of underwriters reneging on their commitment and SEBI initiating proceedings against them. SEBI should move ahead and not reverse the clock.