The Hindu Business Line : Nurture commerce in commodities

GLOBAL COMMODITY MARKETS are once again facing boom times, with prices across commodity categories — energy products, precious metals, base metals and farm produce — soaring to new levels not seen in the recent past. A combination of accelerated global economic growth, strong Asian demand led by China and a weak US dollar (in which currency the bulk of global business is transacted), not to speak of the huge flow of funds from speculators, may be cited as major reasons for the current bull-run. Not to be left behind, the Indian commodity market too is currently riding the crest, spurred by strong GDP growth for the second year in succession and renewed economic interest in commodities. In several commodities — gold, silver, vegetable oil, cotton and pulses, for example — the domestic market, by and large, follows the international trend. Daily trading volumes in the country's three exchanges and a handful of regional bourses together are rising to new heights. The resurgence in commodity futures is a sign of the times — the strong need for price discovery and price risk management. If the commodities sector is nurtured and promoted, there is every possibility that at the current pace of growth, the commodity derivatives market will overtake the equity market in about three years. No wonder, policymakers are training their attention on this growth sector, but not exactly for the right reasons.

A proposal to mandate registration of commodity brokers with the market regulator — Forward Markets Commission (FMC) — has reportedly been made. At present, brokers are registered with the exchanges which perform due diligence before membership is granted. What purpose the additional registration with the FMC would serve is unclear. It is widely believed that registered participants may be forced to pay a fee to the FMC. Any comparison with the system of stockbroker registration with SEBI is unwarranted. The nature, functioning and economic impact of the two markets is not comparable. Last year, the government came up with a proposal to merge the FMC with SEBI on the dubious ground that such convergence would be in the interest of both markets. The move was dropped following near-unanimous opposition from commodity exchanges and market participants. It is time the government overcame its desire to equate the stock market with the commodity market. Except perhaps online trading and settlement procedures, there are significant differences.

Unlike the stock market, the commodity market needs promotional and development initiatives, not stifling regulation. There can be no two opinions that the FMC should be granted financial and functional autonomy, vested with adequate powers and run on professional lines. Importantly, bureaucracy within the regulatory organisation should be minimal as the exchanges are expected to function as self-regulatory organisations. As for funding the watchdog's activities, it is the Centre's responsibility and not that of market participants. Additional registration and transaction fees are the last things this nascent market needs.

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