| June 05
The agro-commodity sector in India has
managed to function despite, rather than due to the age-old methods of
funding from the informal sector. Formal funding has broadly eluded the sector,
partly due to the lack of transparency and partly due to the absence of
conducive structures and regulation. Yet without adequate organised funding,
this sector will not be able to grow and prosper.
At present, due to the fragmented and
largely localized nature of spot markets, price discovery is impeded. The lack
of adequate communication mechanisms between various pockets of buyers and sellers
results in great variations in prices, with spurts in some locations and
distress sales at others.
of spot and futures markets
Deeper futures markets with more investor participants
and listed commodities would be an ideal platform to check price volatility.
However, India’s agri futures markets still have a long way to go in terms of
depth and liquidity. A number of popular commodities currently cannot be traded
on futures markets and large financial institutions are ineligible to trade on
commodities markets at present.
Where the spot markets are concerned, the
government has proposed measures to improve transparency, especially in mandis.
Ithas set up a digital
portal – e-NAM(electronic -National Agricultural Market), which will eventually
be available in 600mandisacross
the country. In addition, it seeks to frame a model APMC Act that
will facilitate sales and purchases across geographies.
However, modifications to the spot and
futures markets alone will not yield much benefit. A complete overhaul of the
entire system, including structural changes to aspects of warehousing and
collateral management businesses, will need to be undertaken to truly integrate
the spot and futures market. Improvements in governance standards and
infrastructure at the mandis are also
a crying need of the hour. Transparency and better use of technology all along
the value chain will ensure deliveries on the exchange platform and gain the
confidence of investors.
Then again, it all comes back to adequate
organised sector finance. Without finance, it is difficult to imagine any
effective and holistic improvements in the agri markets. At the same time,
formal sector finance will only be forthcoming if there is some level of
transparency in the existing set-ups.
To break out of this Catch22 situation, it
appears that SEBI may have to modify sector policies to make them attractive
enough and feasible for the private sector to enter every aspect of the agri
market, from post-harvesting to eventual delivery and the spot and futures
markets in between. It is only then that our great agrarian nation can move
sustainably to a higher growth trajectory.