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Thursday, October 01, 2020

Explained Ideas: What ails with the Agriculture Infrastructure Fund?

India needs to not only spatially integrate its agri-markets but also integrate them temporally, writes Ashok Gulati.

By: Explained Desk | New Delhi | Updated: August 18, 2020 9:36:17 am
Agriculture Infrastructure Fund, AIF, Rs 1 lakh crore Agriculture Infrastructure Fund, what is Agriculture Infrastructure Fund, Explained Ideas, Express Explained, Indian Express“The fund is a major step towards getting agri-markets right,” writes Ashok Gulati.

On August 9, PM Modi launched the Rs 1 lakh crore Agriculture Infrastructure Fund (AIF) to be used over the next four years. This fund will be used to build post-harvest storage and processing facilities, largely anchored at the Farmer Producer Organisations (FPOs), but can also be availed by individual entrepreneurs.

The fund will also be used to provide loans, at concessional rates, to FPOs and other entrepreneurs through primary agriculture credit societies (PACs). NABARD will steer this initiative in association with the Ministry of Agriculture and Farmers Welfare.

“The fund is a major step towards getting agri-markets right,” writes Ashok Gulati, the Infosys Chair Professor for Agriculture at ICRIER. But he points out some missing parts of the puzzle.

Firstly, unless NABARD ensures that FPOs get their working capital at interest rates of 4 to 7 per cent — like farmers get for crop loans — the mere creation of storage facilities will not be enough to benefit farmers. “Currently, most FPOs get a large chunk of their loans for working capital from microfinance institutions at rates ranging from 18-22 per cent per annum. At such rates, stocking is not economically viable unless the off-season prices are substantially higher than the prices at harvest time,” he writes.

The second missing item is the future of the agri-futures markets. A vibrant futures market is a standard way of hedging risks in a market economy. Several countries — be it China or the US — have agri-futures markets that are multiple times the size of those in India.

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How do we fix this?

“First, as NABARD forms 10,000 FPOs and creates basic storage facilities through the AIF, it should devise a compulsory module that trains FPOs to use the negotiable warehouse receipt system and navigate the realm of agri-futures to hedge their market risks,” writes Gulati.

Second, government agencies dabbling in commodity markets should increase their participation in agri-futures.

Third, the banks that give loans to FPOs and traders should also participate in commodity futures as “re-insurers” of sorts for the healthy growth of agri-markets.

Finally, government policy has to be more stable and market-friendly.

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“The bottom line is that India needs to not only spatially integrate its agri-markets (one nation, one market) but also integrate them temporally — spot and futures markets have to converge. Only then will Indian farmers realise the best price for their produce and hedge market risks,” concludes Gulati.

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