FM: Integrate spot, derivative markets

Expert committee will be set up, more funds for <i>mandis</i> joining national electronic platform

Finance Minister Arun Jaitley has proposed integrating the commodity spot and derivatives markets, stating in his Budget speech that the commodities markets require further reforms for the benefit of farmers. 

An expert committee will be constituted to study and promote creation of an operational and legal framework to integrate the spot and derivatives markets for commodities trading. E-NAM, the electronic integration of all Agriculture Produce Market Committees (APMCs) on a single national electronic platform, will be an integral part of such a framework. E-NAM, however, is yet to replicate Karnataka’s success in other states.

The move is seen as a radical step to reform commodities trading in the country. Agriculture is a state subject but if the trading platform is common, it has to be dealt with through a separate set of regulations that do not now exist. The derivatives market has established regulations and infrastructure for commodity grading, assaying and storage apart from trading.

According to Ramesh Chand, member (agriculture), NITI Aayog, the move to integrate both markets will end uncertainty in the derivatives markets over delisting of commodities. The government should also consider state-level electronic markets, wherever established, to be allowed to be linked to the national platform. Such interoperability would help in smooth functioning of e-NAM, he added. Given that there are no global benchmarks, the integration process will be a pioneering effort.

Samir Shah, managing director and chief executive officer of NCDEX, said the move would help farmers obtain the best price for their produce as well as help them hedge on the derivatives platform to reduce risk and maximise benefits. He suggested warehouses accredited by derivative exchanges could act as hubs for mandis or APMCs. Most APMCs do not have proper warehousing, grading and assaying facilities. Exchange-accredited warehouses can provide all these and goods stored by farmers in such warehouses can be sold on the spot platform or hedged in the derivatives exchange. The coverage of e-NAM will be expanded from the current 250 markets to 585 APMCs. Assistance up to a ceiling of ~75 lakh will be provided to every e-NAM market for establishment of cleaning, grading and packaging facilities.

“Integration of APMCs in Karnataka has provided a case study on how a farmer can receive the best available price offered for his produce in the entire state. E-NAM will make it possible to obtain the best price across the nation. The spot price so derived on the electronic platform can be used for settlement of derivative contracts, which at present is obtained by polling spot prices,” said Rajesh Sinha, chief executive officer, NCDEX eMarkets, which is a pioneer in electronic spot trading.

Apart from prices, another benefit that accrues is better financing for the produce. PK Singhal, president and wholetime director, MCX, said such integration would increase relevance of the derivatives platform and allow banks to offer post-harvesting finance in an environment of improving risk management. Electronic negotiable warehouse receipts issued against warehoused goods, be it for the spot market or derivatives, could be used as collateral for such finance, he added.

The road to integration will not be smooth. Vijay Sardana, an expert on commodities and member of the Securities and Exchange Board of India’s advisory committee, said there was a strong lobby of traders in APMCs who did not want reforms and hence, states’ cooperation was crucial. The Centre might be offering funds as a carrot but it should use the stick of denotifying commodities whose prices fell below the minimum support price to help farmers sell at the best price, he added. 

Jaitley also said market reforms would be undertaken and states would be urged to de-notify perishables from APMCs. Another announcement in the budget was that a model law on contract farming would be proposed to integrate farmers who grow fruits and vegetables with agro- processing units for better price realisation and reduction of post-harvest losses. A model law on contract farming will be prepared and circulated among states for adoption.