Trade Talk

June 25, 2021

Trade Talk with Rajat Sarda/
The Maximum Retail Price Idea

Trade Talk with Rajat Sarda: Trade Talk with Rajat Sarda / The Maximum Retail Price Idea

NK Kurup

Reporter

At a glance



 

In May, as prices for pigeon peas, black matpe and green gram soared, authorities in India launched an effort to monitor pulse stocks. Prices have since eased, but traders still fear they might end up on the wrong side of the law if authorities invoke the provisions of the Essential Commodities Act.

“It would be tough to do business under the threat of punishment,” says Rajat Sarda, a director at Rajat Agro Commodities, the flagship of a prominent international commodity trading group in India.

“As traders and millers, we have to take a position to run our business. Millers must keep stocks based on their processing capacity to make sure that the units run full time. Besides, there is a processing time of four to seven days to produce a sizeable lot of finished goods. So a few hundred tons of product always remains in the pipeline,” explains Sarda, who manages the $70 million agri-commodities group in Madhya Pradesh, India’s biggest pulse-producing state located in the center of the country.  

Sarda says the government’s decision to ask traders to declare stocks online panicked the market, as it raised concerns about the government’s intentions. On the one hand, the government lifted import restrictions on pulses to lower domestic prices, while on the other it made the trade nervous about building up inventories. These contradictory measures, says Sarda, can defeat the government’s goals.

The market decides the prices of commodities on the basis of supply and demand, he continues, but government intervention confuses the market and traders. In his view, a better way for the government to meet its goals is to monitor the retail prices of commodities and identify “Red Zones” based on a Maximum Retail Price (MRP). If prices cross into the Red Zone, then it can take corrective measures. This provides traders with a parameter to manage their stocks.

Sarda, a third-generation entrepreneur, believes it is imperative for traders to be granted the freedom to operate in order for the market to function smoothly. The less the government intervenes, the better for the market, which finds its level based on supply and demand. Before joining the family business, Sarda, a mechanical engineer with an MBA degree, worked at a ship chartering firm in Dubai, where he first learned about international trade. In his free time, he enjoys playing cricket and cooking.

In this Trade Talk interview, Sarda, who exports agri-commodities to more than 40 countries, told the GPC that if the government continues to increase the Minimum Support Price (MSP), Indian produce will be priced out of the global market forever.

 

GPC:  In May, India announced it lifted import restrictions on tur, urad and moong through the end of October. Subsequently, the government initiated stock monitoring and also warned the trade it could invoke the Essential Commodities Act to check the prices of these pulses. What are your views on this?          

Rajat Sarda: The prices of commodities depend on supply and demand, but government intervention often distorts the market. On the one hand the government is consistently increasing the Minimum Support Price of pulses every year (in its bid to double farmers’ income in five years), and on the other they are taking measures to bring down prices. Last month as prices moved up, the government allowed free imports of pulses and also started stock monitoring to control prices. There was confusion in the market as the government warned of taking action under the Essential Commodities Act to control prices. What the trade needs is the freedom to operate. It would be tough do business under the threat of punishment.

 

GPC: Is the trade worried about the authorities invoking the Essential Commodities Act?

Sarda: The trade is not sure what the government’s plans are. Traders, millers and importers are all asked to declare stocks. There are traders who also run mills and warehouses. It takes at least four to seven days to get pulses from the warehouses to market after processing. So traders need to keep some stocks on hand. A few hundred tons of product is always in the pipeline.

We have to take a position. Although the government hasn’t introduced any stock limit so far, the stock tracking could be a warning signal prior to invocation of the Essential Commodities Act.  

 

GPC:  What do you suggest, therefore, that the government do to control prices?

Sarda: The government can monitor retail prices. It can prescribe a Maximum Retail Price (MRP) for pulses and identify Red Zones in terms of price range. If prices move beyond the Red Zones, the government can take corrective actions including market intervention. Consumers should also prepare to pay a reasonable price for pulses, based on the cost of production.

 

GPC: The government announced higher Minimum Support Prices for these pulses. What are your views?                

Sarda:  If you do a reality check today, you can see that the MSP is not the best scheme to support farmers. MSPs that are not based on the actual cost of production result in price increases. MSPs that ignore demand and global prices make exports unviable. MSPs were started as a safety net for farmers but have become part of a political agenda.

I am not against supporting farmers, but I think MSPs, as they are being implemented, are not the best way to help farmers. Often, the government agency fails to buy on time, forcing farmers to sell in the open market at lower prices. In fact, the “Bhavantar Bhugtan Yojana” introduced by the government of Madhya Pradesh worked better. Under this arrangement, the state government directly pays farmers the difference between the MSP and the market price. This way, farmers get their money on time. As an exporter, I can only say that, if the government continues to increase MSPs, as it has been doing, then Indian agri-produce will be priced out of the global market.

 

GPC: You have been a leading exporter of chickpeas from India. Prices of chickpeas, like that of other pulses, have increased recently and the trade has been seeking a reduction in the import duty. What are your views?

Sarda: The chickpea output may be lower than the official estimate, but not as low as 4-5 million MT as some people in the industry are predicting. In the current scenario, I don’t expect a duty reduction on chickpeas as prices are just below MSP. If the government still goes ahead and reduces the duty, then it would drive prices down below MSP as cheaper imports would flood the local market. 

 

GPC: What about domestic demand?

Sarda: Demand from hotels and the catering sector, traditionally a major consumer of chickpeas, has been very low due to lockdowns following COVID-19. So the off-take was mainly from the household sector. Once COVID restrictions are eased and the HORECA sector opens up we may see accelerated demand from the domestic market.  

 

GPC: What about the production and export of kabuli chickpeas, which are grown mainly in MP?

Sarda: I think the production of kabuli chickpea is more or less the same as last year, about 200,000 -225,000 MT. We also import kabuli chickpeas. On average, India exports 80,000 MT to 100,000 MT annually, mainly to European countries, the Middle East, Turkey and Sri Lanka. Mexico is our main competitor. If the price difference is more than $100 per MT, we may not find buyers and demand will shift to Mexican product. This year, Indian prices are higher than Mexican prices, so exports are at a standstill since the arrival of new crop in March.  

 

GPC: What other commodities do you export and which are your overseas markets?

Sarda:  Besides chickpeas, we export rice, soyabeans and its derivatives, spices, and other food grains. We export to more than 40 countries across the globe and our footprint is gradually increasing. 

 

GPC: What are your views on the scope for boosting Indian pulses exports?

Sarda: Indian pulses are widely traded around the world. But cheaper goods from Africa and Myanmar have reduced the viability of Indian pulses in the global market. Price is the key factor. As I mentioned earlier, as long as the Indian government increases MSPs, our products will not be competitive in overseas markets. Our farm sector depends greatly on the monsoon and we lack an economy of scale due to farm size. 

So we need a more thought-out strategy to boost farm income. Farmers need more support in terms of better seeds and better procurement policy. Direct cash subsidy could be a better scheme than government procurement, which results in huge losses to the government. Bhavant yojana, started by the MP government, could be an ideal solution if well implemented.

The government also needs look at the interests of the industry as well.

 

GPC: What about government support for exports?

Sarda: The less said the better. Large arrears of duty refunds under various export schemes have been pending with the government for years. These include benefits under schemes such as MEIS and TMA. Exporters are asking for the release of these arrears as we are facing a severe liquidity crunch. We are also waiting for the rollout of RoDTEP, which is WTO-complaint and equally as helpful as MIES, SCIS and TMA.   

 

GPC: Your family has been in the pulses business for nearly six decades. How has Rajat Group’s journey been? How do you plan to grow the Group’s business?

Sarda: Our family has been in the commodity business for nearly six decades. I joined the business in 2004 when Rajat Agro Commodities started operations. We have four processing units with a combined capacity of 1500 MT per day. We are the leading exporters of argi-commodities and have a large domestic business. We are trying to do forward integration by having value-added products and adding new commodities to our business portfolio.

 

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