The Hindu Business Line : Knee-jerk measures

Commodity market, derivatives trading and the market regulator are all in the news these days, though not always for the right reason. Shortages and the rising prices of such essential food products as wheat, pulses, sugar and edible oil are clearly hurting consumers. While a third of the population employed in manufacturing and services sectors can possibly absorb some price rise because of rising incomes, the worst affected are the millions in the rural areas, whose incomes in recent years have been growing at snail's pace, if at all. Unusual price spurts in the futures exchanges have the policymakers worried. Only recently, a Parliamentary Standing Committee on Food, Consumer Affairs and Public Distribution reiterated its earlier recommendation that the Government ban forward/futures trading in wheat and other essential items of mass consumption because the system, apart from not helping growers, has hurt consumers as a result of speculation and other market manipulations. A series of measures to curb volatility in the marketplace has so far yielded little. The latest regulation to hit the market is the ban on advisory services by some registered members of the exchanges to clients for investment in commodities futures contracts. The Forward Markets Commission (FMC) has decreed that portfolio advisory and management services and other services are not permissible in the commodities derivatives market. The aim appears to be to prevent heightened speculation and price volatility in basic agricultural commodities.

One must pity the commodity futures regulator for having to not only bear the brunt of the market participants' speculative frenzy, but also attract flak from the peoples' representatives for the explosive price situation. It is conceivable that, in its desperation to be seen to be acting tough, the FMC decided against advisory services. But market participants are usually adept at beating such restrictions by taking alternative routes. Importantly, it is unclear if the regulator has the legal backing to impose restrictions on advisory services. While some restriction on advisory services is welcome, given that the market is nascent, there is nothing to suggest that placing an embargo on advisory services will contain market volatility.

In all this hullabaloo about derivatives trading, some stark facts are being lost sight of. Agricultural policies have not yielded desired results. The farm growth rate is extremely low. Shortages are becoming more chronic. And there is little accountability on the Government's part for this sorry state of affairs. A serious rethink is called for on addressing structural issues in the farm sector.

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