Prime Minister Manmohan Singh’s assertion at the India Economic Summit that the futures market needs to be improved for better price discovery and regulation is well placed. For, this important function of futures trading is currently not being performed efficiently by the Indian commodity exchanges. Nor are the other key objectives of futures trading, such as price stability and hedging, being adequately served. As a result, both traders and investors are being denied the kind of guidance they look for from futures trading. While global commodity exchanges probably perform this role more competently, the price signals they transmit are often not of much value to Indian commodity sector players because the domestic commodities market is not yet fully integrated with the global market.
However, the fact remains that the underperformance of Indian commodity exchanges is not only due to their own shortcomings. The government must accept a fair share of the blame. Policies pertaining to agro-commodities pricing remain riddled with excessive government intervention. If futures trading has to perform the role of price signalling and price risk mitigation, commodity markets must be freer and less inhibited by government intervention. The plethora of support prices, stock limits, monthly releases (as in sugar) and import and export curbs distort market signals. Besides, the genuine players in the commodities sector — producers, end-users and traders, such as ahrtiyas — are yet to be associated with the futures markets. A large section of those who trade on these exchanges have little genuine stake in the commodities they trade in. While speculators have a role to play in markets, since those intending to manage price risk (hedgers) are able to transfer that risk to those who are willing to take that risk (speculators), speculators cannot be allowed to outnumber hedgers and genuine players. One of the underlying objectives of reopening of the futures markets after a gap of nearly four decades was to allow farmers secure better prices for their produce by deferring the sale to a future date when the prices are more favourable to them. But this goal has, unfortunately, not been realised due to several reasons. For operating on the exchange, farmers need to have large stocks conforming to the minimum stipulated unit of transaction, demat account, permanent account number (PAN) and state sales tax number, none of which they normally possess. What is, therefore, needed is the emergence of aggregators who can pool the produce of a group of farmers and represent them for trading purposes. This system, unfortunately, is yet to take root. Also needed urgently is the introduction of options trading in commodity derivatives which will truly benefit farmers by giving them an option, without obligation, to sell their produce at the quoted price on a future date. Though several expert panels, including a parliamentary committee, have recommended this measure, it is yet to be introduced. The foremost requirement is the strengthening of the Forward Markets Commission by giving it more autonomy and powers and expanding its regulatory network. Unless such issues are addressed, futures markets will be unable to perform the task that the prime minister clearly hopes they will perform.