Survey recommends agenda for commodity market reforms

The Economic Survey for 2008-09 has recommended the agenda for reforms in the commodity market. It has favoured regulation of the commodity futures market by the Securities and Exchange Board of India (Sebi), lifting of ban on futures trading of rice, tur and urad, extension of spot commodity trading in electronic form to agricultural markets by involving APMCs and complete removal of the commodity transaction tax (CTT).

The survey has, in fact, suggested bringing all financial market regulations under Sebi. Since commodity futures were part of the financial market, it should also be regulated by Sebi, the survey said.

At present, commodity futures are regulated by the Forward Markets Commission (FMC).

On the futures trading of rice, tur and urad, the survey said the ban on these commodities should be lifted to restore price discovery and price risk-management.

Futures of rice, tur and urad were banned in early 2007 as trading in these commodities was perceived to be causing pressure on inflation.

Though futures trading in wheat was also banned, the curb was lifted in May this year. Sugar, however, has been put on the suspended list till December this year.

Earlier, commodity futures market regulator FMC had recommended to the government that the ban on all commodities be lifted as there were no direct evidence to suggest that futures trading caused price spiral.

There were 23 regional commodity futures exchanges active in the country prior to 2003 when the government opened the field for nationwide electronic exchanges. The growth of futures trading after that was stupendous and the total turnover crossed Rs 50 lakh crore in 2008.

The share of regional exchanges in the total turnover is less that 1 per cent. Buoyed by the success of electronic trading in the futures market, the economic survey has called for extending spot commodity trading in electronic form to agricultural markets by involving Agriculture Produce Marketing Committees (APMCs), or local mandis.

The two leading futures exchanges in India — the Multi Commodity Exchange (MCX) and the National Commodities and Derivatives Exchange (NCDEX) — have already launched electronic spot exchanges as recommended in the survey. However, there are over 7,500 APMCs (mandis) in the country, where trading takes place in the physical form.

Trading at these APMCs, which are governed by their respective states, needs to be converted into electronic form.

However, Rajesh Sinha, head of the spot exchange promoted by NCDEX, said: “Existing electronic spot exchanges can involve APMCs for expanding the scope of electronic trading. It is good that the role of electronic spot exchanges has been recognised as a tool to transform APMCs.”

The survey has also recommended removal of the commodity transaction tax (CTT). At present, the tax is not in force as it has not yet been notified.

However, the FMC has recommended its removal from the Finance Act on the ground that such a tax is not there anywhere in the world.