The central legislation making warehousing receipts (WRs) negotiable instruments has the potential to transform the business of farming and marketing farm output. The path-breaking Warehousing (Development and Regulation) Act — first mooted in the 1980s, endorsed by a Reserve Bank-appointed working group in the mid-2000s and even enacted into law by Parliament over three years ago, in September 2007 — has finally been notified for enforcement. Besides making WRs a legally valid tradable instrument, backed by physically stored commodities, the statute also provides for setting up a Warehouse Development and Regulatory Authority (WDRA) to regulate warehouses and oversee WR-based transactions. The new system can spur investment in commodity storehouses in rural areas. Besides, it will enable financial institutions to disburse agricultural credit against WRs as collateral. Being liquid legal tender, these receipts, carrying the details like the quantity and quality of the farm produce kept in warehouses, will be eligible for trading, sale and swapping. The holders of WRs will be able to secure delivery against a derivative instrument like futures contract. The WR system can avert distress sales by farmers by enabling them to hold stock and sell when prices on offer are remunerative. The new system will also enable the domestic agro-commodities sector to tap domestic and foreign financial institutions for funds. The statutorily secure WRs will potentially enable the owners of exportable commodities stockpiled in warehouses to go in for foreign borrowing in currencies where the interest rates are relatively low. Even in smaller countries like Kenya and Uganda, coffee inventories are, at times, financed in pound sterling.
That said, the fact remains that the WR system is not entirely without problems. There are some risks associated with the system and this requires stringent regulation and assurance of proper functioning of the system. Like any other paper document, a WR too runs the risk of mutilation, loss or even forgery. Such hazards are, of course, not insurmountable. Introduction of electronic receipts can take care of them to a large extent. But more important is to ensure the credibility and integrity of the warehouses and the WRs. To make WRs acceptable to the trade or the banks, warehouses will have to guarantee the veracity of the quantity and the quality of the products mentioned on the WRs. Besides, the government will have to refrain from needlessly intervening in commodities trade through measures like stock limits, movement restrictions and price fixation.The onus of ensuring the reliability of the WRs and efficient and honest functioning of warehouses will be on the WDRA. The key to the success of the negotiable WR system lies in its ability to win the trust of the stakeholders, especially farmers, but also traders, bankers and warehouse owners. Proper governance is necessary, especially initially, to ensure that the system strikes root in India’s farm economy.