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Warehouse norms may lessen food inflation

Warehouse norms may lessen food inflation
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First Published: Fri, Aug 19 2011. 12 27 AM IST

Updated: Fri, Aug 19 2011. 12 27 AM IST
Mumbai:A committee under the Warehousing Development and Regulatory Authority (WDRA) has recommended regulatory changes that can effectively control prices of food items, improve lives of farmers and change the warehousing landscape in India.
The proposed regulations, drafted in consultation with the capital market regulator, the commodities regulator, exchanges, Indian banks, depositories and Central Warehousing Corporation, aim to create a new countrywide infrastructure for trading of commodity-based securities in the form of electronic receipts as with equity shares on exchanges.
WDRA will notify the new regulations after the ministry of consumer affairs clears them. Mint has reviewed the draft regulations.
The idea is to allow issuance of electronic receipts on the basis of the value of the commodity warehoused by the farmer. These receipts will be traded on spot exchanges registered with WDRA to help price discovery.
Farmers are often forced to sell their commodities at significantly low prices, fearing that in the absence of adequate warehousing facilities they will perish, leading to losses. It is also not possible at present to assess the actual food supply and decide on the right prices with middlemen reaping the benefit.
As there is no fair market price discovery, these supply-side bottlenecks are contributing to spikes in food price inflation, something that the government is finding difficult to control.
The Reserve Bank of India’s macroeconomic review, released ahead of its July monetary policy, said price pressures in food items could continue in the absence of supply responses, as was seen in recent years. Food articles have a weightage of 14.33% in the Wholesale Price Index.
Spot exchanges such as National Commodity and Derivatives Exchange Ltd (NCDEX), National Spot Exchange Ltd and Reliance Spot Exchange Infrastructure Ltd can act as spot exchanges for trading electronic warehouse receipts (EWRs) after getting themselves registered with WDRA.
Entities will be allowed to set up empanelled spot exchanges with a minimum paid-up capital and net worth of Rs 20 crore. A commodity e-record agency, or CRA, will play a similar role that a depository plays for stock exchanges.
The panel has recommended that such a depository can be set up by a public financial institution, a bank, a private body offering financial or electronic registry services or a spot exchange or any exchange with a combined net worth of Rs 50 crore. The existing depositories—National Securities Depository Ltd and Central Depository Services (India) Ltd—can become CRAs with the approval of capital market regulator Securities and Exchange Board of India (Sebi).
On the line of demat accounts for equity trading, there will be demat accounts for EWRs to be issued for fungible goods against unique commodity identification numbers allotted by a CRA.
As a fillip to the proposed regulations, the committee has also suggested a public-private partnership model to create more warehouses, said a person with direct knowledge of the committee’s report.
At present, there are 51 WDRA-recognized warehouses. Allowing private players to open warehouses will significantly resolve storage issues and supply-chain bottlenecks. The number of such accredited warehouses is expected to go up to at least 300 in the next three months.
“This, combined with the proposed infrastructure for EWRs, has the potential to solve food distribution and pricing issues to a large extent and improve lives of farmers,” said J.N. Gupta, an adviser to the committee and a former executive director of Sebi.
According to Madan Sabnavis, chief economist at rating agency Credit Analysis and Research Ltd, WDRA is establishing a regulatory environment that will create more warehouses, increase the number of accredited warehouses and make warehouse receipts negotiable.
“Farmers will find the regulation useful as they will not have to sell in distress at harvest time. They will get holding power. Overall, a regulated environment will benefit the economy in terms of expanding capacity and lowering wastage,” he said.
A CRA will facilitate better records of actual distributable food supplies and help in fair market price discovery, thereby controlling food prices.
“There is no option but to depend on a middleman to sell our farm produce as they have facilities for scientific storage. Since medium and small-scale farmers do not have the facility to store, dry and add value to our farm produce, we end up getting 40% less from these middlemen,” said Thottenkarakalam Bhaskaran Ramadas, a 52-year-old farmer in Palakkad, popularly known as the rice bowl of Kerala.
Ramadas cultivates a range of crops from paddy to vegetables on eight acres.
Even if a warehouse is far from the farmer’s land, transportation costs can be covered if he gets a fair market value for his produces through trading of EWRs.
Gagan Seksaria, associate director (transportation and logistics) at audit and consulting firm KPMG India, said WDRA regulations will enable the elimination of middlemen. It will also encourage the creation of financially viable warehousing capacity in rural India in the private sector and reduce food wastage, he said.
India produces over 200 million tonnes of foodgrains every year. “WDRA will help organize and aggregate agri-trading, and unlock a significant market for the Indian warehousing and logistics services industry,” Seksaria said.
“If we do see new capacities coming in, then there will be a major benefit for the country as it would cut down on wastage and augment supplies,” Sabnavis said. “Price stabilization is more of a medium- to long-term impact of the WDRA. The immediate impact will be creation of warehousing capacity as well as helping farmers get better prices,” said Sabnavis, who was also chief economist with NCDEX.
Seksaria cautioned that the success of the proposed scheme will depend on a coherent execution of the underlying legislative and physical infrastructure. “The backbone of this scheme is efficient and it will be imperative to make investments in this space attractive on the back of fiscal incentives and sensible regulation,” he added.
The spot exchanges where EWRs will be traded, cleared and settled, will also provide insurance cover against any loss.
Farmers like Ramadas say they are at the mercy of middlemen. Even if they have warehouses, they end up either losing the fair value of their produce or the quality as the infrastructure is not adequate.
“Agriculture is profitable only when the country has the right infrastructure for storage and marketing of farm produce,” said Ramadas.
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First Published: Fri, Aug 19 2011. 12 27 AM IST