The bottom line is that India needs to not only spatially integrate its agri-markets (one nation, one market), but also integrate them temporally, with spot and futures markets converging.
On August 9, prime minister Narendra Modi launched the Rs 1 lakh crore Agriculture Infrastructure Fund (AIF) to be used over the next four years. This fund is for building post-harvest storage and processing facilities, largely anchored at the Farmer Producer Organisations (FPOs), but can also be availed by individual entrepreneurs. The point to be noted is that AIF will be used as loans to FPOs and other entrepreneurs through Primary Agriculture Credit Societies (PACS) at concessional interest rates. NABARD will steer this in association with the ministry of agriculture and farmers welfare. The implication of this for the central government budget is not going to be more than Rs 5,000 crore over four years in terms of interest subvention subsidy. What this presumes is that there is a large pent up demand for storage facilities and other post-harvest infrastructure.
This is another major step in the right direction to ‘get agri-markets right’. Earlier, the Modi government had issued three ordinances related to the legal framework of agri-markets with a view to bring about some degree of liberalisation. These ordinances related to the amendments in the Essential Commodities Act, allowing farmers to sell their produce outside the APMC mandi yards, and encouraging contract farming between farmers and processors, exporters, retailers, etc. It may be noted that changes in the legal framework are a necessary condition, but not a sufficient one to ‘getting agri-markets right’. Creation of a post-harvest physical infrastructure is as important as the changes in the legal framework. AIF will help fill this gap. Its positive impact will be seen in due course, depending upon how fast, and how earnestly, they are implemented by various states, FPOs, and individual entrepreneurs.
Since NABARD is also responsible for the creation of 10,000 more FPOs, it can create a package for them for better price realisation of their produce. Here are a few missing elements of the puzzle. There is no doubt that more and better storage facilities can help farmers avoid distress-selling immediately after the harvest when prices are generally at the lowest ebb. But, small farmers cannot hold stocks for long as their cash needs for other family expenditures are urgent. Therefore, linking these storage facilities at the FPO level with a negotiable warehouse receipt system can add value.
Under this system, FPOs can give some advance to farmers, say, 75-80% of the value of the produce at the current market price. But to succeed on this path, FPOs will need large working capital to give advances to farmers against their produce as collateral. Unless, NABARD ensures that FPOs get their working capital also at 4% or 7% interest rate, as farmers get for their crop loans, just the creation of storage facilities will not go far enough to benefit farmers. Currently, most of the FPOs get a big chunk of their loans for working capital from microfinance institutions at rates ranging from 18-22% per annum. At such rates, stocking is not economically viable unless the off-season prices are substantially higher than the prices at harvest time.
This brings me to the second-biggest missing piece of the puzzle in ‘getting agri-markets right’. And, this is the future of the ‘agri-futures markets’ itself. In a market economy, the standard way of hedging market risk is through vibrant futures markets. Be it China or the US, they have extremely large operations in agri-futures markets, multiple times that of India. In India, the value of traded contracts on agri-futures in NCDEX, which is India’s largest agri-commodities derivatives exchange, was Rs 18.3 lakh crore in 2012. It fell to just Rs 4.5 lakh crore in 2019, and in 2020 (upto July 31), it is further down to a meagre Rs 1.5 lakh crore (see graphic). Even in volume terms, the number of contracts fell from about 44 million in 2012 to just 12.5 million. In comparison, in China, even in 2015, the volume of contracts traded on agri-futures was more than 1,000 million, and, in the US, more than 300 million. In the US, the value of each contract is normally much higher than in China and India.
So, how do we fix this missing piece of the puzzle to have a full set of right instruments for farmers to minimise their market risk and have a better price realisation? First, as NABARD forms 10,000 FPOs and creates basic storage facilities through AIF, it should include a compulsory training module for FPOs that includes how to use negotiable warehouse receipt system as well as agri-futures to hedge their market risks. Second, government agencies dabbling in commodity markets, such as the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED), State Trading Corporation (STC), etc, should participate more in agri-futures derivatives.
This is how China deepened its agri-futures markets. Third, the banks that give loans to FPOs, traders, etc, should also participate in commodity futures as ‘re-insurers’ of sorts for the healthy growth of agri-markets. And finally, government policy has to be more stable and market-friendly. In the past, it has been too restrictive and unpredictable. With any rise in agri-prices, the first victim of government policy was agri-futures that faced bans. For most Indian policymakers, agri-futures are a den of speculators, who are blamed for any abnormal price rise or fall! Sadly, they don’t realise that these are important tools of price discovery. By banning/suspending agri-futures at the drop of a hat, they literally kill the price messenger. Thereafter, their policy actions on the price front are like shooting in the dark, and half the time they shoot their own foot!
The bottom line is that India needs to not only spatially integrate its agri-markets (one nation, one market), but also integrate them temporally, with spot and futures markets converging. Only then Indian farmers can realise the best price for their produce and hedge market risks.