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Organized Financing and Transactional Transparency – A Prerequisite in the Agro-Commodity Sector

Commodity Markets | 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.

Opaque markets

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.

Integration 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.

Holistic solutions

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.

Financing propositions

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.

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