Partnerships Key To Success In CSR

PPP, an acronym that gained favour in government services and business ventures in Bengal in the mid-1990s, re-emerged on Thursday but in a new avatar. At a symposium to explore opportunities to collaborate on corporate social responsibility, US consul general in Kolkata Helen LaFave called for private-private partnerships (PPP) to maximize the gain from CSR funds. The traditional definition of PPP is public-private partnership in which the government and one or more private sector firms join hand to create a business or service.

“The new corporate legislation in India creates exciting opportunities to tap the power of partnership, not only between USAID and Indian companies and NGOs but among Indian entities themselves,” LaFave said, kicking off an exciting panel discussion before a packed house at the Bengal Chamber for Commerce & Industry. This is the third such seminar following the ones at Mumbai and Hyderabad.

Elaborating on the power of partnerships, USAID India deputy mission director Kathryn Stevens pointed out that though USAID’s resources had shrunk, it was really not about money but about leveraging one another’s strengths to do more for society.

Social responsibility, SREI Equipment Finance joint managing director Sunil Kanoria felt, needed to come from within. “It is ingrained in Indian culture. The vedas and puranas talk of giving a tenth of earnings back to society. When I got into business, there was account called ‘dharmada’ or donation. So I inculcated the spirit of giving. CSR may be a law today but it has to come from within and be sustainable to make a difference,” he said, calling for self-involvement in the social activity and not just cheque book CSR. WWF-India climate change adaptation head Anurag Danda cited several examples of working with both the government and corporates to create sustainable interventions or development strategies for people in the Sunderbans.

“CSR works only if all stakeholders have a shared vision. There’s a thin line between the passion that an NGO partner brings in and irrationality. It is difficult for some corporate partners to handle this kind of passion unless they share the vision,” said Danda.

It was the realization that 85 rich men in the world had assets equalling that of 3.5 billion people that led to ITC embarking on its CSR path with a vision to create a more equitable society in the country.

“India has 17% of the world population but 4% of water and 1% forest cover. ITC being an agricultural company had encountered the fact that climate change is here and now. The activities that range from e-choupal to watershed projects and social forestry touches 40,000 villages and provide livelihood to 7 million people,” said ITC vice-president Nazeeb Arif, adding that a shared vision with 70-odd NGOs had made it possible.

Century Plyboards president (marketing) Anoop Hoon felt the old adage ‘charity begins at home’ still holds true and that one could embark to do good to others only after sensitizing employees within the organization. “Once you build a culture of CSR within, there is a multiplier effect. Practice internal CSR and create champions who can then take up CSR projects for the company,” he said.

Amway vice-president (east) Diptarag Bhattacharjee stressed on the need to engage with society. The American company that actually got into CSR in 1996 before it actually began doing business in India two years later has been working extensively with the visually impaired.

“We believe CSR is just not philanthropy; it does not mean that we donate some books, give some scholarship or organize a day’s meal and we are through with our responsibilities. CSR is not just giving the fish but providing them the fishing rod. Our aim had always been to engage with focused groups and develop some sustainable projects for them,” Bhattacharjee said.

[THE TIMES OF INDIA]

Unilever Lifebuoy Campaign Reduces Diarrhoea from 36% to 5%

Unilever’s health soap Lifebuoy has announced the results of its ‘Help A Child Reach 5’ handwashing programmes launched in Thesgora, India, noting an overwhelming drop in the incidence of diarrhoea: from 36% to 5%[1].

The decrease in diarrhoea in this village – known for having one of the highest rates in India of this deadly yet preventable disease – was observed over the period of Lifebuoy’s intervention in an independent evaluation of 1485 households with children aged below 12 years, conducted by Nielsen in September 2013.

Lifebuoy’s ‘Help A Child Reach 5’ campaign aims to eradicate preventable deaths from diseases like diarrhoea through teaching lifesaving handwashing habits. The campaign was launched with an award winning film ”Gondappa” (www.youtube.com/helpachildreach5) and handwashing initiatives in Thesgora, a village in Madhya Pradesh.

The results achieved show that handwashing programmes have significant positive impact on both the handwashing behaviours and the health of a community. Lifebuoy’s handwashing programmes are now being rolled out to villages across 14 countries (Bangladesh, Brazil, Egypt, Ghana, India, Indonesia, Kenya, Malaysia, Nigeria, Pakistan, South Africa, Sudan, Uganda and Vietnam) and scaled up in India to reach 45 million people.

This adds to the ambitious goal of Unilever to help more than a billion people improve their hygiene habits by 2015. On 28 April this year, the Unilever Sustainable Living Report 2013 will be published, and it will confirm that Unilever has reached around 303 million people through its programmes of handwashing, safe drinking water, oral health and self-esteem.

Unilever’s health soap brand, Lifebuoy, puts its social purpose at the heart of its innovation and engagement with consumers. The Lifebuoy’s handwashing programmes are not only helping to change habits to combat disease – expert studies have shown that washing hands with soap at critical moments during the day can dramatically cut the incidence of life-threatening diseases like diarrhoea. They are also driving volume growth in key markets. Lifebuoy has achieved three years of double-digit growth to become the world’s number one anti-bacterial brand.

Samir Singh, Lifebuoy’s Global Brand Vice President, explains, “Lifebuoy’s ‘Help A Child Reach 5’ campaign has demonstrated excellent results in Thesgora and we will now be scaling up this campaign globally. To date, Lifebuoy has impacted the handwashing behaviours of 183 million people in 14 countries and the results of our efforts so far prove that when a social mission is embedded into a successful brand’s core values, significant and indeed lifesaving change can happen fast.”

Worldwide, one child dies from diarrhoea or pneumonia every 15 seconds, amounting to 2.1 million deaths each year. Handwashing with soap is the most cost-effective way to prevent child deaths and contribute to Millennium Development Goal 4 (MDG4) towards reducing child mortality. Put simply, the simple but lifesaving act of handwashing with soap could help many more children reach the age of five.

More than 2.5 billion people still lack effective sanitation, good hygiene and safe drinking water. Tackling these issues can achieve a big impact on the diseases that cause ill health and cost lives. To achieve better health outcomes and lower costs Unilever will try to address all three together. Unilever has leading brands – Lifebuoy, Pureit and Domestos – that can make a difference in these three areas.

Next to the 183 million people reached by Lifebuoy’s handwashing programmes, Pureit is providing safe drinking water to 55 million people. Both brands have worked closely with others such as PSI, a Unilever Foundation partner. Domestos and the Unilever Foundation are partnering with UNICEF to scale up its Community Approaches to Total Sanitation programme.

For more information, visit Facebook.com/Lifebuoy.

India now only country with legislated CSR with spending threshold of Rs 15,000 Cr

With the implementation of the new company law from April 1, India has become the only country in the world with legislated corporate social responsibility (CSR) and a spending threshold of up to $2.5 billion (Rs 15,000 crore). 

The new law mandates that all companies, including foreign firms, with a minimum net worth of Rs.500 crore, turnover of Rs.1,000 crore and net profit of at least Rs.5 crore, spend at least two percent of their profit on CSR. 

According to industry estimates, around 8,000 companies will fall into the ambit of the CSR provisions and this would translate into an estimated CSR spend of $1.95 billion to $2.44 billion. With higher economic growth and increase in companies profits, this mandatory spending will go up. 

"India is the only country that has made legislation for CSR spending," Sai Venkateshwaran, partner and head of accounting advisory services at KPMG India, told IANS (Indo Asian News Service). 

He said the new law would lead to a significant increase in spending by companies on CSR activities. 

"Many big companies have been actively engaged in the CSR activities, but the number is low. The new law will lead to a significant increase in the numbers," said Venkateshwaran, adding the mandated spending would be in the range of Rs.10,000 crore to Rs.15,000 crore annually. 

Sidharth Birla, president of industry body FICCI, said the businesses by and large welcome the new legislation. However, some issues continue to trouble that need to be addressed by the regulator. 

"This is an evolutionary concept and will gradually evolve over a period of time. Industry is therefore anxious on the implementation of this new provision," Birla told IANS. 

The new Companies Act 2013 that came into effect from April 1, 2014, replaced six-decade old legislation Companies Act 1956. CSR has been made mandatory under the new regulation and there are provisions of penalties, in case of failure.

Venkateshwaran said the industries' concerns about the new legislation were largely related to taxation and limit on activities that fall under the ambit of CSR. 

Birla also shared a similar view and said: "The biggest concern of Industry is with respect to the impact of CSR contribution from a tax deductibility point of view." 

"Industry hopes that the ministry of finance will find it fit to ensure CSR spend remains tax-deductible, more so since this spend is an integral cost of responsible business," he said. 

Under the current income tax law, the CSR spending cannot be treated as expenditure. It will be part of profit and attract taxes. 

As per the current law, unless expenditure is in the course of the business of the company, the same is disallowed and the question may arise as to whether CSR expenditure is incurred in the course of the business of the company or not. Therefore, the CSR Rules could lead to substantial expenses being disallowed in course of tax assessments. 

"Unless the Income Tax law is also changed simultaneously, this could lead to years of protracted litigation and disputes," said Birla. 

[ - Gyanendra Kumar Keshri] [Economic Times]

Utilise CSR for Social Change

Starting tomorrow (1st April 2014), an estimated 16,000 companies will finally have to start discharging their corporate social responsibility (CSR) as per the new Companies Act, 2013. If most companies actually comply with the requirement of spending 2% of their profits on CSR, an estimated Rs20,000 crore and substantial expertise will flow to the social sector.

This tidal wave is both an opportunity and a challenge. Clearly, the funding will be of immense help given the ocean of needs in India. However, there is also a high risk of money being misspent and stolen. India has nearly three million NGOs. However, many are fraudulent and even many genuine NGOs do not have the capacity to absorb substantial funds.

On the flip side, the vast majority of companies, even otherwise-sophisticated and well-intentioned ones with a long tradition of philanthropy, do not have much of a clue about how to put their money and talent to good use. They often confuse CSR with charity and end up practicing “chequebook philanthropy” — which is simply writing cheques for random requests without any real strategy and, therefore, with very little sustainable impact. Unfortunately, many other companies are busy finding all the loopholes that will enable them to evade their responsibility.

Given this backdrop, how do you approach CSR sensibly?

First, it’s important to realise that CSR isn’t just about compliance with a new Act. It is strategic. Done well, CSR contributes to building corporate reputation and trust. This is critical because trust in businesses is very low, and people are disgusted with corrupt business practices and crony capitalism.

CSR is also a fantastic way of engaging employees. There is a growing desire among educated people to “give back” to society, and a company’s social initiatives are an excellent outlet for this desire.

Working on tough social challenges is also a good way of rounding out rising leaders, and companies that develop a reputation for doing well and doing good are able to better attract talent. Finally, CSR projects can be an important source of innovation.

Microsoft’s work in digital literacy has not only helped nearly 40 million children, it has also inspired product innovations such as Multipoint Server that enables many children to concurrently share a single PC.

Similarly, Hindustan Unilever’s work in rural markets has resulted in the Shaktiamma rural distribution model that today drives 10% or more of the company’s revenues.

Second, it is critical to have the right leadership for your CSR work. The new Act specifies that a company must set up a board committee to oversee CSR with at least one independent director on it.

This is mandatory, but insufficient. You also need to appoint a credible leader who will help shape your CSR strategy, evangelize this to employees, build external partnerships and communicate the impact being created. This cannot be accomplished by a junior manager tucked away deep in the HR department. It has to be a capable leader, well regarded in the organisation and with ready access to the CEO and senior leaders of the company.
It is equally important to pick the areas of focus for your CSR work. Investing in vocational training or literacy in communities around the company’s facilities is an obvious area.

Picking areas adjacent to your core business has great merit because these have the greatest potential to sustain. So, if you are Nestle or ITC, initiatives that help farmers is natural.

However, there are a number of desperately underfunded and important areas that are important to consider, for instance, support for performing arts or support for NGOs that are working on human rights or governance. This is a uniquely opportune time to imaginatively create a portfolio of areas where you want to have impact.

The most important thing, though, is to graduate from chequebook philanthropy to impact investing. Your company is going to be spending 2% of its pretax profits. This is a big deal and needs to be approached with the rigour of a venture capitalist. You need to have a disciplined approach with clear criteria for making grants to the most deserving non-profits.

Mutual expectations and impact metrics must be documented in a simple but stringent MoU. There must be a good process for involving employees to work with each grantee to help build capacity in specific areas like finance, IT or marketing.

Finally, there must be a disciplined annual review of each grantee as well as the whole portfolio that drives necessary course correction.

Instead of seeing CSR as an onerous imposition and a 2% tax, see it instead as a 2% investment in building corporate reputation, employee engagement and innovation. Real CSR not only renews the implicit licence to operate given by society to your company, it helps create a functioning society that we can all live in.

[ - Ravi Venkatesan, former chairman of Microsoft India, chairman of Social Venture Partners India] [Economic times]

Fuelling efficient energy management through CSR

Ensuring environmental sustainability is one of the activities that companies can take up as part of their corporate social responsibility (CSR) obligations under schedule VII of the new Companies Act.

Ensuring environmental sustainability is one of the activities that companies can take up as part of their corporate social responsibility (CSR) obligations under schedule VII of the new Companies Act. This provides an excellent opportunity for companies to contribute to India’s energy security and climate change concerns. Demand side management (DSM) initiatives are one crucial and relevant way for companies to work towards environmental sustainability.

DSM generally refers to initiatives undertaken by electric utilities/distribution companies (discoms) to motivate and facilitate their consumers to adopt select electricity saving, load management, fuel substitution (substituting electricity with, say, solar energy) or demand response measures (collectively referred to as DSM measures). DSM includes maintaining or enhancing the economics and quality of service provided to consumers.

Conserving electricity through DSM makes a lot of sense in the Indian context not only because power generation in India is the largest contributor to CO2 emissions (roughly 42-43% of total CO2 emissions of 1.745 billion tonnes in 2011) but also because the potential to save electricity through efficiency measures is huge. The Planning Commission’s ‘Integrated Energy Policy Report’ estimates that at least 15% of total generation can be saved. This translates into a potential saving of 136 billion units of electricity at today’s generation levels, or reduction of CO2 emissions by about 136 million tonnes per year at optimum levels.

The beauty of DSM is that, although the funds for facilitating it come from consumers themselves, appropriate selection of DSM measures accomplishes load and energy relief for the power utilities, respite from power cuts for consumers, and reduction of the country’s CO2 emissions—all of this economically, i.e. without burdening consumers with enhanced tariffs, and government and discoms with enhanced subsidy bills. In the Indian context, where consumers face shortages as well as spiralling tariffs, DSM by utility companies is really important.

American, European, Australian and even some Asian power utilities have mainstreamed DSM in their day-to-day operations. The usefulness of DSM can be gauged from the fact that utilities, especially in the US, are now routinely spending as much as 2-3.3% of their annual revenues on DSM. But distribution company-led DSM initiatives have hardly taken off in India, except in Maharashtra. Under the regulatory regime of the Maharashtra Electricity Regulatory Commission, mostly privately-owned utilities in Mumbai have been designing and running DSM programmes since 2005.

It is not as if no efforts have been made to introduce DSM in other states. The Forum of Regulators, a statutory conclave of central and state chairpersons, has been undertaking DSM developmental work on an ongoing basis and, as a result, a few state commissions have issued DSM regulations. But at the ground level, very little DSM work is being done. One major reason for this is the lack of conviction among the top management of state commissions and discoms about the efficacy of DSM. This has resulted in commissions and utilities not making serious efforts to gain knowledge and understanding about the what, why and how of DSM programme development and implementation. As institutions, regulatory commissions and discoms have neither the infrastructure nor the competence to undertake DSM activities.

If utilities in India are to realise DSM potential on a sustained basis, top priority will have to be given to institutionalising DSM within state commissions and discoms. It is here that Indian companies, as part of CSR, can make significant contributions by undertaking well-designed initiatives.

Such initiatives could include business firms providing assistance in conducting a series of one-to-one awareness creation and education events for top management of SERCs to secure ‘regulatory buy-in’ to the DSM concept, which would help induce utilities to take steps towards DSM. They could also assist in establishing dedicated DSM cells within state regulatory commissions to facilitate the regulatory process within the commissions. Such cells would provide necessary hand-holding support and guidance to discoms in institutionalising DSM as well as getting oriented about the what, why and how of DSM programme development and implementation.

Indian companies could also assist by providing upfront financial resources for implementing pilot DSM programmes as well as conducting consumer surveys and load research, conducting DSM and demand-response potential studies, and developing DSM-related information systems and databases to aid in planning, programme design, cost-effectiveness assessment, and evaluation. Assistance couldalso be provided in establishing dedicated DSM cells within discoms with a separate staff, budget and resources, as well as hands-on training to utilities personnel in various aspects of DSM. Later, when DSM has become an integral part of the day-to-day operations within state commissions and utilities, Indian firms can contribute by providing financial assistance to implement various DSM programmes and projects under the PPP mode. 

By choosing to further the cause of DSM in India, Indian companies would thus not only be able to fulfil their CSR obligations but also make significant contributions to the nation’s energy security and climate change mitigation efforts.

[Views by - Vijay Deshpande , Pramod Deo - The financial Express]

CSR: An equal responsibility of SMEs

SMEs play a critical role in generating millions of jobs, especially at the low-skill level. It is imperative that India works towards making the smaller enterprises CSR compliant.

Over 8,000 large companies complying to Corporate Social Responsibility (CSR) has been a remarkable policy adoption by the Indian Government. This move has put India in league with countries like Sweden, Mauritius and Norway who have robust policies on CSR for industries. But where India lags behind these countries is that the Companies Act does not successfully bring CSR into the mainstream.

India is a country of SMEs. It is imperative that India works towards making the smaller enterprises CSR compliant. Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports. SMEs have a much wider spread, hence a wider reach across communities. We can extrapolate and comfortably say, that the geographical reach through SMEs is vastly higher than through the larger enterprises.

UNIDO on its website on CSR defines Corporate Social Responsibility as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. The SMEs need to realise that CSR is not just about spending money. It is an ‘attitude’. The excuse of being small will only prevent the SME from becoming world class.

SMEs are equally responsible towards making living conditions better for their employees and their families. What SMEs do not realise is that CSR is the only way through which the company can achieve a balance of economic, environmental and social goals. As we move ahead in the 21^stcentury – India can achieve its dreams, and turn its burgeoning young population into an asset only if each company big or small takes on responsibility for social, educational and environmental upliftment at large. This will go a long way in creating harmony between workers and the management, while at the same time addressing the expectations of all stakeholders in business.

E-waste management, Courtesy: Pluss Polymers

The smaller enterprises need to not always spend in rupee terms for CSR. They have to first educate themselves on CSR. The UN through its UNIDO programmes in developing countries has successfully defined a Triple Bottom Line (TBL) Approach, which has proven to be a successful tool for SMEs in the developing countries to assist them in meeting social and environmental standards without compromising their competitiveness. The TBL approach is used as a framework for measuring and reporting corporate performance against economic, social and environmental performance. SMEs need to realise that profit alone will not drive them to become successful. They have to successfully integrate environment and society with economics.

UNIDO continues to articulate very appropriately that “A properly implemented CSR concept can bring along a variety of competitive advantages, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes”.

At a whopping approximately 48 million, India has the second largest number of SMEs in the world, after China. While SMEs are the predominant form of enterprise in India, it is essential that they also comply to CSR standards and are reportable to the government. The government should consider modifying the Companies Act to ensure at least a reporting by SMEs on what they have done. This will force them to begin to think on those lines.

Forcing, however, undemocratic it may sound, is often a tool to initiate and change thought processes. CSR could for beginning be within their organisation – More often than not, SMEs tend to ignore the environment within the company itself. They could even look at motivating and training employees on health, sanitation, skill development, environment - these would change the immediate environment and benefit their families which in turn benefits the company.

Figure 1

CSR initiatives will begin to result in higher motivation and loyalty among employees. This in turn will lead to better production efficiencies, lower employee turnover, and eventually lower costs for companies. Very soon, organisations will see an increased sales turnover due to the competitive advantage derived from a good CSR policy.

Compliance to CSR will ensure that the bulk of SMEs undertake the following to help produce quality products and derive customer satisfaction, thereby improving the overall environmental and social surrounding of each one of them (refer Figure 1).

Large corporations have significant impact on society and environment. They are concerned about their brand reputation too. Therefore, they invest in CSR. However, it is important to appreciate that social and environmental impacts are interconnected. The two are related and have to be treated as one by everyone, whether an individual, small enterprise or large enterprise. CSR has to evolve into ISR – Individual Social Responsibility - eventually for India to become developed. Hence, it is imperative that SMEs take on this responsibility. It is the government’s responsibility to enable such a revolution, by bringing in the SMEs into the CSR act in a careful and responsible manner. The rules have to be enablers and not irritants for the SMEs. 

It is a no brainer that in India SMEs have frequently abdicated their environmental and societal responsibilities. This statement in no way implies that large organisations have become sustainable and are responsible. However, it will be fair to say that more and more large organisations have taken or are taking steps to reduce their environmental impact and in the process giving back to society, which is the very reason for their existence.

To create the sweeping change in education, environment and society that India needs, the returns from focussing on large organisations are diminishing with time. The focus has to shift to enabling SMEs to make an impact on the society and environment. The changes they can bring about, as they have done in manufacturing and contribution to the GDP, in turning India into a developed country through making an impact within their organisation and their immediate neighbourhood is enormous.

This, in no way is to imply that large organisations have become ‘sustainable’, or cannot do much to reduce their environmental or societal impacts. However, it is fair to say that a number of large companies have progressively undertaken steps and measures to improve their social and environmental performance.

It is also well known that the large organisations, being forced to disclose their wider sustainability impacts, have increasingly passed on the burden to the SMEs which form their supply chain. The significant environmental and social impacts of large organisations are hidden in their supply chains! This is because of increasing cost competitiveness. So, the government and auditors really need to get to the root of the problem.

India along with other developing countries is known for unsustainable practices of suppliers of raw materials (eg in electronics manufacturing, electroplating, dyeing or polymer recycling) or the unethical labour practices of production which is outsourced (eg in retail and clothing). These companies do not garner the same scrutiny as their large customers.

With a changing global economic landscape and the rising aspirations of the middle class in India, it is high time, SMEs begin to change themselves and factor in an attitudinal change towards the society and environment and do their bit in the progressive change required to turn India to a better place in the near future. SMEs should remember, if the society and environment around them fails, businesses will fail too. They should also consider CSR as minimising negative impact and creating positive impact in what they do every day of the week. If they begin documenting this, CSR will happen not just automatically, but within their existing resources!

[A view by - Samit Jain, MD, Pluss Polymers , courtesy- Business Standard]

How Commexes Can Bring Social, Economic Changes

Michael Porter and Mark Kramers’ magnum opus “Creating Shared Value” (CSV) is different from corporate social responsibility (CSR).

CSR programmes essentially emerge as necessary expense for a firm in a market economy to improve its reputation. CSV, on the other hand, reflects on the interconnectivity between societal and economic progress, and according to Porter and Kramer, “… has the power to unleash the next wave of global growth”. CSV postulates that competitiveness of a firm and the social development indicators are interdependent.

According to Porter and Kramer, the market economy can unleash the next upsurge of global growth only when societal concerns enter into core strategic decision-making of firms. There are three key ways in which firms can create shared value opportunities: by reconceiving products and markets; by redefining productivity in the value chain; and by enabling local cluster development.

With this premise, one needs to look at the core business of commodity exchanges. The principal objectives for which commodity exchanges have been set up in India are hedging and price discovery. While hedging is a micro-level function of the exchange, price discovery is a macro-level function, both of which, if performed properly points to inextricable entrenchment of the commodity exchange in the business of creating shared value.

Reconceiving Products

Firms can meet social needs while better serving existing markets, accessing new ones, or lowering costs through innovation. Commodity exchanges in India are doing that, though not truly to the full potential. Exchanges have been proactive in re-conceiving products such as mini- and micro-contracts thereby enabling small traders and SMEs’ access to cost-effective risk management. Services such as Exchange of Futures for Physicals (EFPs) have also been conceptualised. The potential in this domain is huge, but existing regulations act as limiting factors for further innovation, as only plain vanilla futures can be traded in the Indian commexes, and products such as options, indices, and other exotic products are not allowed.

Redefining productivity

While performing their desired macro-level and micro-level functions, in certain commodities, the commodity exchange has opened new vistas in the form of separate marketing channels. The emergence of efficient marketing channel has unlocked significant value in mentha oil, benefitting mentha farmers, processors, exporters, and consumers. The profoundness of this impact can be made out from the emergence of India as the major exporter of processed mentha crystals, displacing China. Mentha oil futures allowed processors to manage raw material risk – price, quantity and quality risks – all of which enabled Indian exporters to provide better price and delivery commitments to international buyers. Such a facility helped them consolidate at a time when Chinese exporters were defaulting on export commitments. Moreover, the high export prices of processed mentha crystals have been transmitted as high farm-gate prices of mentha oil due to the competitive structure of the trade channel, which has ultimately benefitted farmers.

Cluster Development

While documented evidence on this ground is less, there is no doubt that the potential for the comexes for cluster development is immense. It needs to be appreciated that the electronic platform makes the business operate at national levels, rather than local levels. Local cluster development, therefore, need not be thought of as merely having local suppliers or developing local infrastructure. Rather, cluster development needs to be viewed through the prism of community development. The gold ecosystem, by itself, has benefited substantially from gold futures by the process of price discovery/ dissemination and hedging, but the most critical driver of this ecosystem development is technology. Through the business model itself, there has been ecosystem development in the form of warehousing, testing, assaying, etc. According to an estimate of 2011, the commodity exchange business has given rise to employment of around 1.5 million through ecosystem development.

The movement from here

That a development of an institution like the commodity exchange brings with itself social, economic, physical, and philosophical changes was best exemplified by the history of evolution of the Chicago Board of Trade in US. While development of CBOT led to the various demands for infrastructure development, the development of enabling infrastructure also helped CBOT emerging as the prime trading forum. The importance of CBOT thus emerges from the changes in the institutional practices not only in the domain of agricultural marketing, but from the impacts that it created at the socio-politico-economic stratum of human existence. Can we see Indian exchanges moving towards that direction?

Views by - Nilanjan Ghosh, Chief Economist at MCX (I) Limited. (Views are personal.) [Business Line]