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G. Chandrashekhar

MUMBAI, Oct. 29

INDIAN agri-commodity market has witnessed some welcome changes in the last few years. Removal of trade-related restrictions such as on storage, movement, credit access and so on has freed the trade and industry from operational constraints that stymied growth.

On the physical side, commodity trade today is freer than ever before. No doubt, some restrictions still remain, like the operation of Essential Commodities Act or the cotton monopoly procurement scheme of Maharashtra Government. However, in terms of productivity, quality, cost and infrastructure Indian goods have still to go a long way before becoming globally competitive.

A new challenge facing the industry and trade is growing competition from imports. With the removal of quantitative restrictions on imports, Indian market is wide open to foreign goods. So Indian producers must prepare themselves to compete with highly subsidised, low-priced foreign goods.

In other words, Indian agri-commodity sector faces both internal and external challenges. These challenges need to be recognised and addressed. Some of the internal challenges need non-price and non-trade solutions such as farm management, sound agronomic practices, rural infrastructure and so on.

The National Agriculture Policy has rightly recognised the critical role of agriculture in ensuring growth with equity. It is necessary to test whether our policy initiatives contribute to meeting the basic needs of this section of the population so vulnerable to income changes.

It is in this context that the international conference on commodity futures and derivatives trading organised by the Ministry of Food and Consumer Affairs and the Federation of Indian Chambers of Commerce and Industry in association with UNCTAD in Mumbai (October 30-31) assumes importance. The meeting will seek to examine India's opportunities in the emerging global context.

Although India has had a long yet chequered history of futures trading, the concept was almost forgotten after the 1960s, until its re-launch in the mid-1990s. Amidst much fanfare, the Government cleared futures trading in a large number of commodities. In some cases, permission was given even without some basic need-identification survey.

No wonder, the existing commodity exchanges in the country, barring a few, are not doing well at all, with low volume and poor liquidity the main feature. At the same time, the Government has been encouraging setting up of a national commodity exchange (on the lines of national stock exchange). The assumptions policy makers have made in recommending a national commodity exchange and their validity are yet to be made public.

Either because of ignorance or mistaken belief, the policy makers seem to think that futures trading is the panacea for all the ills of the commodity market. Far from it. Futures markets do not thrive in isolation. A futures market is nothing but an extension of the physical market. A strong, healthy, vibrant physical market is sine qua non for a successful futures market.

Unless the physical market is so organised to reflect the intrinsic strengths of the country's agriculture and agricultural markets, it would be futile to expect the futures market to deliver tangible benefits to the intended beneficiaries.

Mr Sharad Yadav, Union Minister for Food and Consumer Affairs, will inaugurate the conference. It would be interesting to see what advise and guidance the Minister will provide.

Speakers from within the country and abroad will deliberate on a wide range of subjects including reform, taxation, design of exchanges and clearing house, structured financing and warehouse receipts, and roadmap for the future. The statutory, institutional and operational impediments to the growth of futures trading should be identified and addressed. Restrictions on physical trading have to be removed. The current restriction of spot trading that too with a limit of 11 days for delivery and payment should be scrapped. Unless players are allowed to sell-buy forward, there will be no price risk that they would need to hedge in a futures exchange.

The regulatory authority — Forward Markets Commission — needs to be professionalised and a lot more efficiency built into its functioning. A commercial intelligence and market research desk to track commodity market dynamics is imperative. A need-identification survey must precede every decision to permit futures trading in commodities.

On their part, the existing futures exchanges should cease to be private clubs of some players. In their undue anxiety to obtain permission for trading more and more commodities, the exchanges seem to sacrifice efficiency and utility on the altar of opportunism.

It is to be hoped that the meeting will come up with worthwhile suggestions for strengthening the commodity futures markets and draw up a practical road map for the future.

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