India has a unique distinction of creating monoliths in the name of farmers yet the objective is to provide a better support function to established financial institutions.
As long as there is a public acknowledgement of this fact, there is nothing wrong in creating better systems. The tagging often in the name of the farmer is done to gain legitimacy.
The most recent initiative in this space was the creation of a regulator by the name of WDRA (Warehousing Development and Regulatory Authority). The WDRA Act 2007 came into operation on October 25, 2010, almost after three years since the bill was passed by Parliament. The regulator’s mandate is to put in place a negotiable instrument in the name of warehouse receipts (WHR). The main challenge shall be to create a foolproof network wherein this instrument is not used in the manner in which a large corporate house had done previously (issuance of multiple physical shares with the same number) or the fraudulent use of bank receipts by Harshad Mehta for leveraging in the stock market.
With the increasing “financialisation” of the commodity market, the laws and governance initiatives of the government seem to have remained etched in archaic classical economics of demand-supply and individualism. Institutionalised DEF (desire, expectation and fear) has now taken over the individual’s role in commodity markets. Price manipulation and leveraging are not anymore a businessman’s individual prerogative but are achieved through well-designed plans of policy manipulations and systemic loopholes. The new regulator is expected to bring a much-desired foresight in an environment of governance myopia.
While promoting instruments for pledge & collateralised struc ture in the commodity market one needs to take into considera tion the financial ramifications of these instruments. In the current legal structure, the ministry of consumer affairs may not be well-equipped to handle a financial instrument of this nature and the equipment are available elsewhere within the country. Without direct access to the ministry of finance and RBI, WDRA may not be constrained to access a regular financial information flow, talent and resource pool.
On the “farmers welfare account”, needless to mention, a majority of Indian farmers produce a lot size which is nonremunerative to be funded by financial institutions after considering the overall transaction cost and credit delivery cost. Therefore to make a case out of WHR that the instrument is going to help in preventing distress sale and shall give better access of credit to farmers is a more of a public relations exercise which is hard to be consumed even with a pinch of salt.
The chances are that in order to achieve economies of scale for credit delivery, we might see a new financial intermediation option and not a direct credit delivery. If an instrument of such great importance gets notified (if at all) in the Negotiable Instrument Act, then can we restrict it to only “agricultural produce” that will be the death sentence for the instrument (WHR) or will that be a solitary confinement?
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