Inventory Intermediation I: Horticulture

The recent crisis in horticulture is a grim reminder of how vulnerable businesses in the Valley are. Within a couple of weeks, the entire horticulture sector and along with it the Valley economy received a major setback. The Rs 20,000 crore apple industry contributes 10 to 12 per cent of Jammu and Kashmir’s GSDP. With the livelihood of 7 lakh families, largely small farmers, dependent on the apple trade, the income impact will be widespread. Expectedly there have been demands for compensation from the government. But those haven’t gone any further.

While this underscores the obvious need for Kashmir to have infrastructural intermediation -- better and more reliable road connectivity, and accredited storage facilities -- it also calls for an overlay of greater financial intermediation. This will provide an efficient and profitable enabling environment for managing flows of goods, capital, and information. In the process generate incomes across the value chain.

The first consequence of a snapped or a disrupted connectivity is the buildup of finished goods inventories in two predominant sectors of the Valley economy: horticulture and crafts. Both export oriented, but inventory buildup obviously is most critical in the case of the horticultural goods which are perishable with a very limited shelf life. In the case of crafts, it increases the already high cost of carry of finished goods inventory.

In fact, one of the important structural constraints to growth of the Rs 2,50,000 crore ($30 billion) J&K economy is the high level of inventories. Besides supply chain dynamics, and traditional market linkages, it has to do with the structure of the economy as well. A high inventory to the state gross domestic product makes the cost structure of the economy high. The high cost of carry of finished inventories, with high-interest rate regime, cuts into both their profitability as well as competitiveness of the local businesses.

In the last 15 years or so, while the physical infrastructure of horticulture has improved substantially, financing infrastructure has not kept pace. If anything, it has slackened. The present capacity of Controlled Atmosphere stores in Kashmir stands at around 3.5 lakh metric tonnes. Yet besides the green field project financing that was started in 2007 not much has been done. The physical infrastructure that has been created needs to be complemented and supplemented by financial infrastructure. Only then can it help monetise the value chain and provide integrated market access. At the firm level, the benefits to bottom line will accrue through a reduction in the cost of carry as well as inventory monetisation.

Towards this end, the recent introduction of warehousing receipt financing by the J&K Bank has the potential to be a transformative financial instrument for horticultural inventories as well as financial intermediation in horticulture. The Electronic Negotiable Warehouse Receipts is a well-accepted and prevalent financing solution which will improve the horticultural supply chain infrastructure.

The Warehouse receipt financing can significantly support the apple industry in Kashmir Valley by addressing financial and market challenges faced by growers, particularly in the context of the region’s economic and logistical constraints. Apple growers in Kashmir often face delayed payments due to the perishable nature of apples and market fluctuations, with prices dropping sharply (e.g., Rs 750- Rs1,000 per 10-12 kg carton compared to Rs 1,300- Rs 1,400 last year).

A warehouse receipt facility allows farmers to store their apples in certified warehouses and obtain receipts that can be used as collateral for bank financing business operations. This provides immediate liquidity to cover production costs, labour, and transportation without selling at low market prices during oversupply.

This enhanced access to formal credit systems, will reduce the reliance on exploitative middlemen who often dictate low prices. So too the buyer-financer nexus which is usurious. Banks and financial institutions accept warehouse receipts as secure collateral, offering loans at lower interest rates. Even if the interest rates are a tad high in the beginning, the market pressure will bring these in line with the national rates. By leveraging it, Kashmir’s apple industry can address liquidity issues, reduce market risks, and enhance economic resilience.

However, to transform warehouse receipts into a viable financial instrument for supporting industries like the apple industry in Kashmir Valley, several steps are required to ensure they are standardized, secure, and widely accepted in financial markets. To bolster the Warehouse Receipt system for Kashmiri apple farmers, a robust legal and regulatory framework is essential.

It will help if a legislation recognising warehouse receipts as negotiable financial instruments and ensuring their enforceability as collateral needs is passed in the legislative assembly. The National Warehousing (Development and Regulation) Act, 2007, can serve as the guiding framework for the legislation. It would also help to have a regulatory body, such as the Warehousing Development and Regulatory Authority, which is mandated to oversee warehouse receipt issuance, standardization, and trading, ensuring clear ownership free from disputes.

Along with the financial benefits, there are long term benefits that accrue to the industry. It will catalyse greater formalisation of the apple trade. Standardized warehouse receipts detailing commodity specifics (e.g., apple grade, quantity) ensure acceptance by banks, which need training to assess WR-backed loans.

For instance, warehouses will require Warehousing Development and Regulatory Authority accreditation, meeting standards for storage (e.g., cold chains for apples), security, and insurance, with regular audits to maintain credibility. It will also catalyse the Integration with commodity exchanges and more cost effective crop insurance with third-party quality verification and grading (e.g., pest-free status). Infrastructure, including modern cold storage and improved logistics, is critical to minimize post-harvest losses. Subsidies, partnerships with banks and cooperatives, and market linkages for real-time price data further strengthen the system. By addressing these gaps, warehouse receipt financing, which facilitated Rs 4,000 crore in loans by 2023, can empower J&K’s apple farmers with better credit access and market resilience.

With the apple industry contributing 10 to 12 percent of the aggregate income of the J&K economy, the more evolved financial intermediation can stabilize the growers’ incomes by reducing financial distress during low-yield years or dry spells, as seen in the recent crisis due to recent precipitation deficits.

For now, warehouse receipt financing not only enhances but also can democratize access to finance. Small farmers, who lack assets for traditional loans, can use stored apples as collateral, enabling reinvestment in high-density orchards.

(The second part of this column, Inventory Intermediation II: Crafts, focusing on the innovative options for financing of finished goods inventory in the artisanal sector will be published on Thursday, next week.)

The author is a Contributing Editor of Greater Kashmir.