India's good old 'mandis' are all set to make way for swanky spot exchanges soon. In two months' time, winds of change will sweep across the country's agricultural sector with the launch of electronic spot exchanges.
As a result, an Indian farmer will, for the first time, have multiple options to sell his produce. He would no longer be dependent on Agriculture Produce Market Committees
India's largest commodity bourses -- the Multi Commodity Exchange and the National Commodity and Derivatives Exchange -- are poised to set up national-level spot markets in a couple of months.
"The Spot Exchange will provide a platform where farmers can sell at the best possible rate and the end users can buy at the most competitive price. National Spot Exchange will also provide services like quality certification, storage of goods and other customised value-added services.
"We hope that after the launch of the spot exchange, the canvass of commodity trading would be complete with India having both the spot and Futures market available on electronic platform with national reach," says Anjani Sinha, Managing Director and Chief Executive Officer of the MCX-promoted National Spot Exchange.
NCX is targeting Gujarat, Maharashtra and Rajasthan. Initial stages will see the launch of 10 centres in these states. NCX is a joint venture of Financial Technologies (India) Ltd, Multi Commodity Exchange and National Agricultural Cooperative Marketing Federation of India Limited. The biggest beneficiary of this new system will be farmers. Not only will it reduce the number of intermediaries between the farmer and end-consumer, it also strives to offer the best price to the farmer for his produce.
"Currently, only 25-30 per cent of the price paid by the consumer is actually realised by farmers. The rest of the proceeds get appropriated by a long chain of intermediaries. In the US, farmers' share is between 60 and 65 per cent," says Kalyan Chakarvarthy, country head (food and agribusiness), Yes Bank.
In the present system, APMCs serve as primary market between the farmers and traders. It basically serves the local traders in procuring produce from the farmers. Prices are dependent upon local demand and supply factors
and farmers have no choice but to accept the price offered by the traders. There is no knowledge about the price of a particular commodity prevailing elsewhere. There are about 7,577 regulated mandis in the country today.
"APMCs basically encourage monopolies. Simply put, in the present system, there are a large number of sellers and few buyers, so the buyers dictate the price. It should be the other way round," explains Dr M S Jairath, Director of National Institute of Agricultural Marketing at Jaipur. It is this monopolistic nature of APMCs which the spot exchanges seek to curb.
Spot exchanges will offer more options to both the farmers and the traders. The present system doesn't offer the best to the traders as well. There is no denying the fact that they control the prices and sometimes might be making huge profit based on high margins. However, they have to deal with high risk of counter party defaults and disputes relating to quality, weight and other factors. In many ways, credit risk is the biggest hurdle in the structured growth of physical trade. It is all the more troublesome since there is no dispute redressal mechanism.
While spot exchanges are being touted as the next big thing for the Indian agriculture industry, there are a few problems, which need to be addressed before they are launched. There has already been a delay of around a year in the launch of spot exchanges.
Reasons are many. First, the government is fighting for amendments in the APMC Act. "Basically, there are three things, which we need to address. We want amendment, which would give recognition to spot exchanges. Then we should be allowed two days after the deal to make a payment. In the current scheme of things, the buyer is supposed to make the payment immediately.
"This is critical since the buyer on our system can be branded as a defaulter if this amendment doesn't come across. Apart from this, we want to be regulated by State Agricultural Marketing Board, which is the apex body. We don't want to be regulated by the APMCs, since there are about 100-150 APMCs in every state and it will be very difficult to function," says Mukund S Annigeri, head (spot market), National Commodity and Derivative Exchange Limited