A good law passed

Amidst the ruckus over the Indo-US nuclear deal that kept Parliament's eventually aborted monsoon session paralysed for a good bit of its time, the law-makers did, fortunately, manage to pass the long-pending Warehousing (Development and Regulation) Bill. This farmer-friendly legislation, introduced in the House two long years ago, provides for making warehousing receipts, issued by registered warehouses, legally valid as negotiable instruments just as cheques and demand drafts are used. What this means is that farmers will be able to put their produce in designated stores for deferred sale in the hope of realising better prices, instead of disposing it of immediately after the harvest, when prices are generally at their lowest level. Receipts issued by warehouses can then be used as collateral for obtaining loans from banks and other financial institutions, for working capital and for consumption purposes. Farmers can use this new option for not only managing the price risk but also the wastage risk, because the services to be provided by registered warehouses include fire insurance and wastage insurance. Even more significantly, by encouraging farmers to use scientifically operated, temperature- and moisture-controlled warehouses, this statute will help attract more investment to the neglected warehousing sector. The current paucity of modern warehouses results in a colossal wastage of farm produce, reckoned at between 20 and 40 per cent of the harvest, and also constrains the growth of futures trading in farm commodities. But since most of the new warehousing capacity will come up in the private sector, the government has been true to form and chosen to provide for the establishment of a warehousing development and regulation authority, though the orderly running of warehouses could well have been ensured through the rules framed to give effect to the new law. More jobs for the boys!

Apart from farmers, banks and other financial institutions too will welcome the new measure, as warehousing receipts will help them to recover their dues even if a farmer has defaulted on loan repayment. Indeed, such a system for boosting the flow of credit to the farm sector has been in place in several countries for quite some time and has generally worked well. But in most cases this has been a commodity-specific exercise: for sugar and rice in the Philippines, and coffee in Kenya. In India it has been introduced, though only on a limited scale, by some national-level commodity exchanges in collaboration with selected banks and financial institutions. However, the system today works on the basis of mutual trust and understanding, without any legal sanction for the use of warehousing receipts. The existing negotiable instruments law recognises only financial instruments as negotiable tender. Hence, the need for the new statute.

However, one of the major objectives of the mooted measure, to improve farmers' access to the banking system and thereby to undermine the role of moneylenders, may be served only partially. For, there is every possibility that the moneylenders, most of whom are also commodity traders and commission agents, will also begin accepting warehousing receipts as collateral for lending money and later using them for trading in the stored goods. It is, therefore, essential that the banking sector is sensitised to make its loan-sanctioning procedures as simple and prompt as possible, so that the formal financial system can compete with private moneylenders, and thereby give farmers the full benefit of the new legislation.