Time To Give The Right Signals
The decision to upgrade Kochis domestic futures commodity exchange for pepper to an international pepper bourse is a positive sign, but the government has still not mustered up enough courage to permit futures contracts in agricultural items. Even the Kabra Committee Report which was submitted way back in 1994 is gathering dust. The official dithering over this issue has led to uncertainty about opening up of the agricultural trade. It has also strengthened fears that the government lacks the resolve to push through reforms in the farm sector.
Several economists agree that a predominently agrarian country such as India should have begun the reforms process starting with the agricultural sector and not, the other way round. This neglect is even more glaring in view of the fact that the country has managed to develop a fairly strong farm sector.
At present, domestic forward trading is allowed mainly in six commodities, including cotton, jute, gur, castor, pepper and potato. Forward contracts in sesamum, copra, safflower, cotton seed and staple fiber yarn are allowed in principle but the government has not yet granted recognition to any association for trading these contracts.
This despite the fact that futures trading in agro-based goods has a fairly long history in India. Indeed, the first organised futures market for various types of cotton, the Bombay Cotton Exchange, was established in 1921. It was soon followed by setting up of the Seed Traders Association Ltd in Mumbai in 1926, which traded in oilseeds and their products. Subsequently, several other bourses dealing with futures trade in commodities like jute, pepper, turmeric, potatoes, sugar and even foodgrains came up.
However, the inflationary trend witnessed in the 1940s in the wake of the World War forced the government to discourage futures contracts and introduce price controls. It also prompted it to set up the Forwards Markets Commission (FMC), to supervise and regulate futures markets. The exchanges self-regulatory powers, therefore, got gradually transferred to the FMC.
Though the government started thinking about softening agricultural trade policies in the mid-1960s, (i.e soon after the green revolution), it could not shed its inhibitions about opening up trade. The first forward markets review panel, the Dantwala Committee, was appointed in 1966. Another one, the Khusro Committee, was set up in 1979. Both these panels recommended the revival of futures trading in a wide range of commodities but these reports were never implemented. The Kabra Committees Report, which also made similar suggestions, seems to be heading for the same fate. However, the issue has come alive again, with a study conducted jointly by the World Bank and the commodity division of the UN Conference on Trade and Development (UNCTAD). The study concluded that this concept was worth trying out. The study Managing price risks in Indias liberalised agriculture: can futures markets help?, published in November 1996, clearly points out that the regulatory and institutional environment governing the
operations of futures markets needs to be improved to ensure orderly development.
The study has also concluded that futures markets need not hinder the targets or goals of existing policies, especially if they follow some basic rules of the free market. These are: government interventions should not eliminate price risks; they should not strongly restrict the normal flow of commodities in the economy; they should leave a sufficiently large part of the physical trade in the hands of the private sector and let the policies clear the market; they should provide for a stable and predictable external trade environment. The study clearly states that futures trading in rice, wheat and sugar is impossible, since none of these conditions can be fulfilled under the present policy framework. In any case, even if the government allows futures trading in these items, private parties are likely to show very little interest as these are bulk commodities which enjoy a good deal of official patronage in terms of subsidised transportation and distribution and rigid retail price regimes through market interventions.
However, for other agricultural commodities, notably cotton, oilseeds and their derived products, several minimum conditions already exist. In their case, spot and futures markets can be allowed to develop in synergy. The controls imposed on the physical markets (normal markets) through curbs on storage, movement and access to credit should not prevent commodity futures markets from operating in these commodities. In fact, the presence of a futures market will encourage those active in physical trade to improve their market practices every time a government restriction is relaxed.
The study strongly recommends complementary introduction of groundnut oil and rapeseed oil futures with corresponding seeds futures contracts in some regional exchanges. Access to oilseeds and oils futures contracts will raise the competitiveness of the Indian oilseed industry which is now facing stiff foreign competition from imported edible oils.
This, together with the presence of large illegal futures trading in oilseeds, points to the large demand from the industry for the introduction of futures contracts in the oilseed complex. In an open trade environment, futures contracts facing little competition from abroad are likely to stand a greater chance of success. This implies that groundnut and rapeseed-mustard futures contracts should stand a greater chance of success than soyabean contracts which will compete with other international contracts, the study indicates.
The conclusions of this study, as also those of the earlier three committees, merit serious consideration by the government.