This is another case of the left hand not knowing what the right is doing. In order to promote commodity trading, the government has cleared amendments to the Forward Contracts Regulation Act (FCRA) and the Bill is expected in the Budget session. Once it gets passed, it will allow options trading in agricultural commodities. Since an option serves as a guarantee of a minimum price (in this case, a put option), it can be a replacement of, or a supplement to, the existing scheme of public procurement of agricultural produce at an officially-determined minimum support price (MSP). Indeed, using options in place of the MSP system would cut procurement costs since the government does not have to lock up money while procuring and then storing produce. All that the government needs to do is to pay the option premium on behalf of the farmer. If such a system is introduced, the Food Corporation of India's procurement operations could be restricted to what is needed for the buffer stock as well as for subsidised public distribution. Nevertheless, farmers all over the country would get assured price support, as opposed to the current system, where farmers in just a handful of states get the benefit of the FCI's procurement. It should go without saying that using options to replace the MSP-based system would have to be a gradual process, so that farmers get used to the new idea. | |
| The amendments to the FCRA were approved by the NDA government (the Rajya Sabha even passed the Bill then), but the UPA has gone into the issue afresh and now made up its mind on the changes required. But even as one arm of the government has been doing this, another arm has passed an order which has brought all jute trading in commodity markets to a halt for nearly a fortnight. It appears that since there was a poor jute crop, prices were ruling at around Rs 1,550 per tonne. The jute mills petitioned the jute commissioner, who has fixed the price at Rs 1,430 per tonne. No dealer or trader is allowed to buy or sell raw jute at a price higher than this. Naturally, all trading on the exchanges has come to a halt. Apart from the fact that higher commodity prices benefit farmers, the larger issue is that of price discovery and the role of the market. The current problem relates to jute, but similar orders could as well be passed for wheat and rice, or cotton. The government has to realise that creating market instruments to solve problems means that solutions must be left to the market to work out, and official intervention should be only in the rarest or most extreme of cases, when there can be no dispute over where the balance of convenience lies. |
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