Private investment in scientific warehousing capacities can aid the growth of the food processing sector

One of the significant advantages of private warehousing is that it allows for a more flexible approach. (Representative image)

In her Budget 2023 speech, the finance minister had proposed the creation of massive decentralised warehousing capacity ‘to enable farmers to store their produce and realise remunerative prices through sale at appropriate times’. Though the details are not yet out, here’s an attempt to provide direction to the policy focus.

The need for augmenting the national warehousing capacity lies in the rapid growth of the Indian food processing sector, which is growing at an average rate of 8.4 percent and is expected to touch $535 billion by FY2026. The food processing sector is rather raw material cost-intensive and hence vulnerable to price swings. Procurement and storage during peak supplies is the predominant strategy. However, that locks in considerable working capital in raw materials. A robust warehousing sector with seamless connectivity with the financial sector would make their financials healthy and spur growth. It will also help the country attract more foreign direct investment (FDI) into the food processing sector.

Need Scientific Warehousing Capacities

Connecting warehousing with the world of finance necessitates the availability of scientific warehousing capacities and a well-managed ecosystem of collateral management services providers. While there are no such norms to check if warehousing practices are scientific, the Warehousing Development and Regulatory Authority (WDRA)-accredited warehouses will be scientifically managed, given the compliance norms for everything from the structure of a facility to handling.

Additionally, the WDRA-accredited warehousing ecosystem can provide trust and ease of access for financial institutions, providing a competitive ecosystem of collateral management players. A healthy collateral management ecosystem can be ensured through robust governance and regulatory norms for the operations of collateral management services providers. Electronic commodity repositories functioning under the WDRA regime and a healthy collateral management ecosystem will be a win-win for the food processing industry to efficiently manage their year-round raw material availability besides locking in their prices in the physical markets. It underscores the need for robust growth in the country's WDRA-regulated scientific warehousing capacities.

Should such capacity be created using public resources, or should private players provide it better? Global experience says that public storage shall be limited to food security purposes, and excessive agricultural products can be carried forward through private players who have created scientific warehousing capacities. The key to the development of private capacities lies in the creation of the commercial value that it can provide to its clients. It lies in safely carrying the commodities forward and financing them to unlock the capital. Hence a WDRA-mandated warehousing capacity would increase the commercial attractiveness of private investments in the sector.

Reducing Food Wastage

A national mandate can reduce about 50 percent of about Rs 90,000 crore of food lost to wastage due to unscientific storage of food grains. Given that our food subsidy for FY 2024 is estimated at Rs 197,350 crore, the mandatory WDRA regime will help the economy save about Rs 45,000 crore of food wasted due to unscientific storage.

From a policy perspective, we need to move on from strategic storage to even out supplies for the healthy development of the food processing sector. Warehousing plays a crucial role in agriculture, as links farmers with consumers. For the fast-growing food processing sector, warehousing helps even out seasonal commodity flows and hence their raw material costs. As the government has proposed the creation of significant warehousing capacities, the thrust should be on encouraging private investments into the sector, besides mandating WDRA compliance for all private and public capacities available for all commodities covered under it.

While the public storage shall be used for strategic food storage purposes, it will help if the public warehousing behemoths start providing warehousing facilities for farmers, farmer producer organisations, traders and food processors on a commercial basis. Indirectly, it will reduce the food subsidy bill and public expenditure as the operational costs shall be entirely borne out of the revenue from the provision of third-party storage services. With the growing food processing sector, the WDRA-compliant public sector warehouses can provide scientific storage services and connectivity to finance to help them meet their working capital needs. With the universal mandate of WDRA storage of all notified commodities, even the public sector warehousing players can remain financially independent and declare dividends.

One of the significant advantages of private warehousing is that it allows for a more flexible approach, as investors and companies can tailor their storage and logistics requirements to business needs. Besides, private investors shall make investments where there is commercial potential by locating themselves at the core of the value chain for the respective commodities. Private warehousing will also bring in efficiency, as it is subject to market pressures and competition, leading to better services and more streamlined operations. By making private warehousing a viable business, companies that invest in it can expect attractive returns. In conclusion, the government shall be better off by encouraging the development of commerce behind the warehousing ecosystem, mandating WDRA for all storage service providers for the notified commodities, providing credit guarantees, and enabling finance guidelines enhancing the flow of warehouse receipts finance.

V Shunmugam is adjunct faculty at National Institute of Securities Markets. Views are personal, and do not represent the stand of this publication.