The commodity market in India, especially agri-commodities, is on the cusp of transformation. The three biggest bottlenecks – storage, logistics and financing infrastructure inadequacies – that plagued the sector and resulted in colossal harvest and post-harvest losses are finally being eliminated with a synergistic combination of technology, physical infrastructure and stronger regulation.
During the pre-Independence era, India had a flourishing Market for commodities such as cotton, edible oils, etc. In 1952, futures’ trading in most commodities was banned due to shortages of essential commodities, which resulted from wars and natural calamities. The ban was lifted in 2002 and several national level electronic exchanges and regional exchanges for trading commodity derivatives sprung up, including the Multi Commodity Exchange (MCXNSE 0.26 %), National Commodity and Derivatives Exchange (NCDEX), National Multi-Commodity Exchange (NMCE) and Indian Commodity Exchange (ICEX), Universal Commodity Exchange (UCX) and the ACE Derivatives exchange (ACE), in addition to numerous regional exchanges.
Further technology infusion:
Despite these tech-savvy exchanges, not much changed at the ground level. The physical sale of agricultural produce was still administered by states, with each state following its own regulations. Further, within each state there were several market areas and every area had its Agricultural Produce Marketing Committee (APMC), which dictated regulations, fees, etc. This structure tends to compartmentalize markets and inhibit the free flow of commodities from one area to another. In addition, handling of commodities at multiple levels attracts multiple mandi charges, which in turn cause an escalating in the prices for consumers, without the benefit being passed on to farmers.
To bring transparency and efficiency into this fractured market, in April 2016, the Prime Minister launched the electronic National Agriculture Market Platform, with the expectation that it would reduce transaction costs and information asymmetry and enable better price discovery in the physical agri-commodities market. Taking a cue from this initiative, fintech companies introduced e-auctions in agricultural commodities to contribute to transparency and fair price discovery in agri-commodities. Other benefits expected from the use of technology in this segment are faster payments to farmers, lower inflation for all, better monitoring of demand-supply gaps and more effective regulation. In a nutshell, e-auction portals help farmers command better prices for their produce and bypass middlemen. One can even help transport the produce to the mandi/market.
The government has also been actively incentivising private investments in warehousing by including agriwarehousing under the priority sector lending. In addition to various subsidy schemes and tax sops to attract investor companies, it has promulgated the Warehousing Act, 2007, which seeks to encourage the regulation and development of warehouses. Under the purview of the Warehousing Development and Regulatory Authority (WDRA), a new breed of storage facilities have emerged that are scientifically crafted.
They are also supported by value-added services, such as weighing, testing and certification and even come equipped with 24×7 physical security; a number of them sport CCTV-led remote monitoring facilities from a central location.
The most interesting feature of these modern-day warehouses is that they possess an IT backbone, which enables real-time stock updates at the click of a mouse. As these warehouses undergo regular physical audits, both by internal and external teams, the physical integrity of the stock – both in terms of quality and quantity – can easily be
ascertained at any point of time. These state-of-the-art, high-tech agri-warehouses enable farmers to leverage their produce to gain finance – using electronic Negotiable Warehouse Receipts (e-NWRs), which in turn protect their produce from becoming post-harvest agri-waste.
Regulation and reform:
While the Forward Markets Commission regulated the commodity markets since the early 1950s, it was perceived as lacking the power to control wild fluctuations in prices and other irregularities.
Accordingly, in 2015, Sebi – which carried the reputation being superior in terms of surveillance, risk-monitoring and enforcement mechanisms, was merged with the FMC, creating a more robust regulatory body for the sector.
Subsequently, Sebi has implemented a slew of advancements within the commodity market space. These include allowing stock brokers to deal in commodity derivatives, common broking businesses for equities and commodities,
permitting the NSE and BSE to bring commodity derivatives onto their trading platform, introducing option contracts in commodities trading, permitting FPIs to participate in commodity derivatives contracts traded in stock exchanges subject to certain stipulations, allowing certain categories of foreign institutional investors to participate in the domestic commodity derivatives, etc.
Future of agri-commodities:
Looking ahead, it appears that the Indian commodity markets, especially the agri commodities segment is headed for better days. Not only will it become more efficient, in terms of warehousing, storage and physical trades, but it is expected to become more broad-based, vibrant and deep due to the facilitation it has been receiving from Sebi and the stock and commodity exchanges.
Being one of the largest producers of over 80 per cent of agricultural products, including many cash crops, these game changing initiatives can propel India onto a completely different level of sustainable growth.