A confident and mature democracy should boast of a stable policy regime, and capacity to withstand temporary shocks in the economy. Especially so when the nation aspires to be a developed nation in the next 25 years. Therefore, it is a bit surprising to see a notification from the Department of Consumer Affairs invoking the archaic Essential Commodities Act, 1955 on the eve of Independence Day. It is a directive to State /UT governments to enforce disclosure by stockholders of Tur Dal (pigeon pea) and to upload weekly data of stocks online on the portal of the Consumer Affairs department.

The action presumably is meant to prevent traders from resorting to restricted sales in an attempt to create artificial scarcity and price rise and protecting the interests of consumers. The government is closely watching the overall availability and prices of pulses in the domestic as well as overseas markets to take necessary pre-emptive measures in an event of unwarranted price rise in the festival months. Going by the historical trends, the next step could be putting stock limits, though there is no chance of banning futures trade as Tur Dal contracts are not traded in the futures market.

Price volatility

The volatility in agri-commodity prices is caused by multiple factors affecting both supply and demand. While short-term volatility is influenced by factors such as droughts and floods, unusual variation in temperatures, as seen in the case of wheat this year, and policy responses — for example, governments promoting oilseed production or banning exports — there also appears to be increasing evidence of a more structural supply issue that is driving long-term volatility.

The instability of agricultural commodities prices is systemic, given that agricultural production depends on the monsoon. This causes uncertainty around the pricing of agri-commodities and livelihoods of people dependent on agri value chains, be it traders, corporates, processors, wholesale merchants or retailers.

Therefore, the moot question is: Do short-term measures like stock limits, ban on futures, etc., actually help? A stable policy regime requires certain clearly defined mechanisms and processes that take into account the weather and related factors. It must not only informs the decision-makers about the sowing and cropping trends in a particular commodity, but also provides information on stocks in hand, the current and likely prices in the crop cycle, the likely yield/consumption pattern, etc. And this can be done easily as the necessary tools are already available or just one legislation away.

In the interest of a stable and transparent regime, it is essential to get the Warehousing Development and Regulatory Authority (WDRA) regulation approved in Parliament at the earliest. This regulation will help bring transparency into the system. If the government mandates that all warehouses exceeding a particular capacity, say 2,000 tonnes, need WDRA registration, then with the click of a button, the WDRA and people in government will know the stock-holding in all WDRA-approved warehouses.

The government can utilise the WDRA provision to promote eNWR ( electronic negotiable warehouse receipt) that can be traded on repositories and can be easily pledge financed by banks. The eNWRs will be free from physical issues like tempering, fudging, mutilation, etc., and will eliminate possibility of multiple financing and frauds. The eNWRs can save expenditure on logistics as well, because the stocks can be traded through multiple buyers without physical movements and can be split for partial transfer or withdrawal and with a proper record.

The WDRA system, in conjunction with the existing tools like the commodities derivatives markets, which is regulated by SEBI , can provide the government the tools to monitor the value chains in an efficient way. The combination would provide a reference price point to the farmers, on the basis of which they may decide on sowing a particular crop in the season. If the futures price is not as per expectations, the acreage might go down and the government would know in advance whether import or higher procurement price is essential to ensure increased planting. The futures contract also gives indication of expected yield, as the prices of contract might go up or down, depending on the indications from the field and the government can respond accordingly, rather than reacting in an ad hoc manner.

Further, the positions of stock in warehouses across the country and movement of commodities can be easily monitored to ensure that there is no undue cornering of commodities and profiteering by any section to take advantage of any perceived scarcity. A stable policy regime is the need of hour to ensure that the farmers and the value chain benefit.

The writer is MD and CEO, NCDEX

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