After making the right noises for four years, the current Budget finally makes a bolder move in making agricultural storage more scientific, more structured and more viable. As the second largest producer of products that require cold storageâ€”milk, potatoes, fruits, fish, meat, and so onâ€”India has surprisingly slept on an active policy in the cold chain department. Yet, given the government support to pricing rather than the process has held back private participation in the sector, says Shashidhar Nanjundaiah.
The entire warehousing industry, the last mile in the logistics chain, has been low-priority in our country. There has been some rather myopic argument against cold chainâ€”that essential commodity prices will shoot up as a result of this sophisticated technology. Because it is agriculture-related, technology is frequently underminedâ€”a psychological, rather than logical, inference.
The cold storage industry itself is estimated to be at Rs 15,000 crore, and expected to reach a whopping Rs 40,000 crore by 2015. But as against 80 per cent in the United States and even in Malaysia, only about 0.2 per cent of Indiaâ€™s fruits, vegetable production goes through cold storage. The use of cold storages in India is heavily lopsided in favour of potatoes: 80 per cent of cold storage is used for that produce alone, thanks to the genesis of cold storage in India in the 1960s, which focused on storing potatoes and their seeds. As against a production of 180 million tonne (mt) a year of fruits, vegetables and perishables, India has a capacity of storing only 23.6 mt in 5,386 cold storages across the country. According to the industry estimates, 30 per cent of fruits and vegetables, and five to seven per cent food grains in India get wasted. But these may be conservative estimates, as more than half the produce, experts say, comes from distress sale from farmers. â€œAbout 40 per cent of our fruits, vegetables get wasted,â€ says Anil Choudhary, MD and CEO, National Bulk Handlers Corporation, one of the countryâ€™s largest private companies in agricultural infrastructure. â€œBut even with new policies promoting agriculture warehousing, including cold storage, not much investment has come in.â€
The main reason private players will offer for their reluctance is viability issues. Terminal markets will surely get a boost because of the new Horticulture Mission, for example, as will cold chain receive a shot in the arm because Finance Minister Pranab Mukherjeeâ€™s Budget has provided infrastructure status to the cold storage industry. The concessions are of two types: while one provides a project import status for cold storages, warehouses and mandis, the other makes such projects eligible for raising funds through external commercial borrowings (ECBs). In essence, accordance of infrastructure status means that the segment will now be eligible for viability gap funding (VGF), and that international and domestic players may get back to their boardrooms to discuss viability. But the cold chain will remain a long-gestation industry because the sum cost of the process will not match the final prices. As Choudhary says, â€œCold storage has unfortunately not still been plugged at the back end with the farm, and on the front end to the market.â€
WDRA and intent to seek private participation
The government permits 100 per cent investment in cold storage infrastructure. The actual investment is also a nice, round figure: zero.
In January this year, the Warehousing Development and Regulatory Authority (WDRA), which was constituted under the Warehousing Act 2007 in October 2010, called for Expressions of Interest (EoIs) to monitor warehousing activities. This move indicates a sincerity and firmness on the part of the government to treat agricultural warehousing as the sort of infrastructure that can entail private participation with serious monitoring.
If agricultural warehousing must work through a sort of PPP, where market conditions will strategically dictate how much and how long the produce will be warehoused, private players will demand that the government take its hands off that matter. It is unlikelyâ€”perhaps socially undesirable as wellâ€”for the government to free prices of essential commodities. But cold storage commodities will benefit from private participation because apart from the produceâ€™s availability in the market, perhaps through the year, such privatisation will steady up the pricesâ€”with regulatory monitoring.
Farmers need scientific warehousing infrastructure and the market closer to them, and our present system has not fulfilled that need adequately, particularly credible warehouses that can be linked to the markets. This would include the financial market so that the commodity can be liquid anytime the farmer needs it.
One of the first significant steps in the direction is making warehousing receipts negotiable for all commodities including agricultural ones, with an objective to encourage scientific warehousing of goods, lowering the cost of financing, ensuring a shorter supply chain, enhancing rewards for grading and quality, and providing for better price risk management. The move will make warehouse receipts a prime tool of trade and facilitate finance against it. On the other hand, as BB Pattanaik, Managing Director, Central Warehousing Corporation, predicts, it will allow banks to improve quality of their lending portfolio and enhance their interest in lending in respect of goods deposited in warehouses.
In a way, privatisation will entail a more systemised form of middlemanship. Such intervention may not be so bad if the system works for an overall plan towards better pricing and better strategy. A proper warehousing infrastructure will mean that farmers can be given those facilities to hold, meet the liquidity needs, and not resort to distress sale. It will also hold prices steady.
This is why experts believe the scope for private participation is much larger in cold storages and the entire cold chain, which mainly address cash crops, horticultural and floricultural crops.
Private participation in cold storage will bring in sustainable efficiencies that are needed in the agricultural sector. Practitioners still do not believe they will be handling a large portion of the pieâ€”about 20 mt out of the 450-460 mt that may be available. An expected Rs 10,000 crore needs to be pumped in immediately, experts say.
Where can viability issues be plugged? CWCâ€™s Pattanaik maintains that private participation was not envisaged traditionally because private participation itself was not forthcoming: â€œWarehousing being capital intensive with low returns, private sector was shy of investment and hence public sector was inevitable.â€
Under the present logistical network, business can be quite seasonal under a lack of a quick transportation network that could keep cold storage busy through the year. â€œLack of scientific storage means cities depend on close hinterland produce for their supply,â€ says Aun Aejaz, Director, Doehle Danautic Logistics. â€œAbolishing the octroi charge, a relic of the license raj, will ease inter-state transport. Although many states have done away with it, it persists in states like Maharashtra.â€
Few countries are endowed with the geographic potential to grow agricultural produce, but spurring growth may come at an initial spurt in prices. A favourable agro-climatic situation with good soil, perennial rivers and plentiful monsoons is marred by the lack of a strategic reserve and round-the-year harnessing of water resources uniformly. Viability is likely to remain iffy until a firm implementation plan.
The opportunity starts from building scientific warehouses. The post-harvest loss of perishables in India has been estimated to be close to Rs 1 trillion a year. As much as 57 per cent of it is avoidable by eliminating wastage. Commissions and avoidable costs of storage make up the remaining 43 per cent of the loss. Although private participation to address the deficit in the storage capacity will be through FCIâ€™s hiring godowns from private parties for a guaranteed period of seven years, a more integral model is also needed. The Mandi Act mandate for purchase of produce only through the APMC structure is restrictive. A liberalisation of the procurement process will help bring prices down.
That is why it will be surprising if private players make a frenetic dash this year to participate in this segment, notwithstanding the new Budget boost and the recent, if still tentative, steps towards making agricultural warehousing overall, and cold storage in particular, integral to have sustained growth. The time for private participants is to understand that returns will be low in percentage, but the scope for expansive growth is high. There will be far better participation also when the governmentâ€™s two agenciesâ€”the Ministry of Agriculture, the Ministry of Financeâ€”can assure private investors how the dichotomy between socialised and subsidised produce and more viable produce (via privatised warehousing) will be addressed, and how those two categories will complement and cooperate with each other.
Infrastructure Today factor of 3
The Pied Piper Power to lure PPP
1. Exempt from duty (as against a five per cent duty currently) and service tax refrigeration, and power for agricultural storage, initial setting up and expansion of cold storage, cold room (including farm pre-coolers for preservation or storage of agriculture and related sectors produce) and processing units.
2. Make WDRA a single point of negotiations, contract award, clearances, regulation and monitoring.
3. Provide better articulation to buffer stock and strategic reserve, so that warehouses and cold chains can maintain both mandatory and strategically feasible stock.