Why FCI can’t assess its actual stock

Flawed data collection, huge wastage of grains plague the Corporation

On paper, the FCI (Food Corporation of India) is said to be holding around 67 million tonnes (mt) of stocks in its warehouse. However, no one knows how much of it exists in reality - physically.

For any Government or bureaucracy, it will be difficult to arrive and acknowledge the actual physical stocks position. Various innovations have been created over the last two years to bring down the reported stock from 80 mt.

The Modi Government had promised to clean up the mess of the previous rule. Will it be in a position to de-legitimate the legacy of the last 50 years (FCI was established in 1964)?

Two years ago, it was found in Indonesia and Malaysia that more stock of palm oil existed than what was actually being reported, primarily due to flaw in data collection. It was also a manoeuvre to keep prices at a desired level for exports with low stock reporting (the two countries being net exporter of palm oil).

The case of buffer stock in India is actually the opposite. Siphoning off huge quantity of grains in the guise of waste is one of the major issues for the FCI.

At a time when chances of lower production are looming large in the country due to lower-than-normal monsoon, it can be a disaster to even report a correct picture. The mess is being circumvented by trying to break a monolith called the FCI.

Recently, in China, the state-owned Citic Resources reported that about half of the alumina stockpiles it had stored at China’s Qingdao port could not be located, heightening concerns over the use of commodities for financing in the country.

In the case of FCI stocks, in the last 50 years, banks have never asked any stock statement assured by the fact that there is an underlying sovereign guarantee. This kind of dual reporting is not new; even the Soviet system (which India later adopted) had a complicated grain stock reporting method in which invisible stocks (nevidimeye zapasy) and visible stocks (vidimeye zapasy) were classified. These secrets were hidden under “osobye papki” (special files under highest secrecy).

No doubt, the Indian bureaucracy has developed these tricks into a fine art. The question remains whether the elected representatives can force the removal of the veil from such dark practices.

Published in The Business Line on 28 August, 2014

Warehouse receipt system can help develop market mechanism

A well-developed process can provide a focus for improving the entire commodity chain.

The Warehouse Receipt System has a potentiality of a very high socio-economic payoff in India but it has not taken off due to various regulatory constraints.

The WDRA (Warehousing Development and Regulatory Authority) is authorised to regulate only the negotiable warehouse receipts of the commodity ecosystem.The authority has not been mandated nor does it have the jurisdiction to regulate the entire warehousing space, which remains a domain of various State Warehousing Acts. Even, non-negotiable warehouse receipts do not fall under the regulatory ambit of WDRA.

Since its constitution in 2010, the authority has not been able to convince the banks to use negotiable instruments for agricultural funding in any significant scale due to many structural defects in the WDR Act itself. The bankers privately confess that negotiability of the warehouse receipts in the current context of the Act does not give them adequate safety and assurance of repayment.

In case of default, the authority does not have the power to insulate the lender of safe return of the borrowed capital. The regulator has no direct control over the actions of the accredited warehouse, which may move stocks around without the knowledge of a regulator who is not on site.

The WDR Act has considered the structural robustness of the warehouse as fundamental to the accreditation process whereas in reality, the credibility of entities managing these warehouses has primacy on which the transactional business rests.

Therefore, it is important that warehouses should be adequately capitalised to carry on the activity. The adequacy of capitalisation and credibility of the warehousing entity has been totally ignored in the spirit of the Act.

Moreover, if a warehouse operator goes bankrupt, it may also be difficult for the bank to prevent priority being given to other creditors. To make the system successful, it requires careful analysis of the legal issues and a very rigorous set of guarantees and oversight mechanism.

Sometime back, the FMC (Forward Markets Commission) had directed the commodity exchanges to adhere to the standards of WDRA norms for accreditation of warehouses for exchange delivery. However, it must be noted that WDRA has no jurisdiction over any commodity exchange’s delivery mechanism. A registration with WDRA does not empower the authority to regulate the delivery on futures market.

The FMC is the supreme authority in case of anything that governs the delivery process along with the commodity exchange’s warehousing.

Warehouse receipt systems can play a central role in developing the framework of modern market institutions. A well-developed WRS can provide a focus for development of the entire commodity chain, providing incentives for a range of different parties including farmers, financiers, traders, processors and public sector buyers.

Difficulties stemming from the policy and institutional framework have made the introduction of WRS a difficult undertaking in India.

Published in The Business Line on 14th August, 2014