Policy Watch: Why an NSEL was waiting to happen

The intents always appeared to be right; but the actions weren’t.

The intents always appeared to be right; but the actions weren’t. The moral fibre was lacking. As John Milton once remarked, “The road to hell is paved with good intentions.”

The idea of how to promote agriculture and prevent fraud was mooted in 2000, when the World Bank agreed to fund a pilot project for storing 6 lakh tonne of grain in top-loading silos so that the grain stored first would be the first that would be taken out. But after the pilot project was successfully set up, the desire to increase warehousing capacity wilted (see table). Grain was allowed to rot.

Thereafter, a bill for good warehousing was tabled in 2005, passed in 2007 and enacted in 2010 under the title Warehousing Development Regulations Act (WDRA). A regulator was appointed, but the key decision of empowering the regulator was never taken. The WDRA remained toothless.

The WDRA did the following:

1. Made the warehouse regulator the final authority for approving warehouses and their functioning.

2. Made warehouses responsible for assaying the quality and quantity of grain accepted for storage, which meant that its quality auditors had to be vetted by the WDRA.

3. Laid down specifications for warehouses, and rules for issue of warehousing receipts.

4. Made warehouse (storage) receipts non-negotiable instruments, thus compelling banks to honour them immediately. Thus, ownership of the grain could be transferred in a dematerialised manner through the transfer of receipts. The value itself would be on the basis of commodity exchange prices, both for spot or future purchase or sale.

5. Imposed stiff penalties on warehouses for any flaw in weight/quality specified in the storage receipt.

What the government did not do was to create a central registry of all warehouse stocks and receipts with the WDRA.

Such a registry would ensure that the same grain could not be sold to two or more parties, just as the bogus banker’s receipts (BRs) during the Harshad Mehta scam were. Despite the knowledge of the Harshad Mehta scam, the agriculture and the consumer affairs ministry, and more specifically the finance ministry, did nothing to alert Parliament or the Forward Markets Commission (FMC) about this loophole. The WDRA regulator, too, did not blow the whistle, content instead with the perks of office. It looks as if someone wanted a scam to happen.

It helped government procurement agencies charge first-grade rates for second grade grain, and allow the evidence to be destroyed in the rain and sun. It allowed states like Haryana to even change FAQs (fair acceptable quality, not ‘frequently asked questions’) of grain whenever the farmer lobby wanted substandard grain to get procured. Haryana thus legalised the charging of first-rate prices for second-grade wheat. And, eventually, it helped NSEL as well.

In fact, the government did not even allow warehouses to come under a single authority. Ostensibly, there was opposition from state governments. But in reality, the will was lacking.

Otherwise, warehouses under the WDRA would have been set up across the country, ideally not more than 100 km away from any farm. Even marginal farmers could bring their harvest to the warehouse, get it weighed and assayed, and obtain a receipt. No distress selling. No grain rotting.

The smallest farmer could then go to any bank, liquidate his receipt in full on the basis of spot prices prevailing, or sell his grain on futures markets. Alternatively, if he had the staying power, he could choose to hold on to the grain in the warehouse, and it could be sold later after clearing the warehousing charges.

But the government did not care for the farmer, or the rotting grain. It was possibly more interested in quick money being made by promoting another scam.

DNA/R N Bhaskar