The Hindu Business Line : Optimism on commodity exchanges unfounded

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Mumbai Feb. 27 The Economic Survey 2006-2007 has expressed confidence that the commodity futures exchanges, which have seen a consistent increase in turnover over the past few years, may remain vibrant in 2007-08 witnessing larger volume and value of commodities traded. However, the situation on the ground is far from inspiring.

The fact is that only four commodities out of the 94 allowed for trading account for over 70 per cent of the total turnover. This does not speak highly about the commodity futures market in terms of its width and depth.

Most commodities listed on the exchanges continue to witness listless trading, if at all. The policymakers and the regulators (Forward Markets Commission) owe an explanation on whether adequate research and stakeholder consultation preceded grant of permission; and whether any investigation has been carried out to ascertain the poor performance of a large number of commodities.

Bullion (gold 31 per cent and silver 19 per cent) alone accounted for exactly half of the total trading volumes. Guarseed and chana (gram) with 11 per cent and 10 per cent respectively are the other two items.

Indifferent public

The Survey has admitted that gold and crude oil account for the major part of the total transactions in the futures market at present.

But the common man (aam aadmi) has little to do with the prices of bullion and energy products on the exchanges on a daily basis.

The common man is indeed unconcerned because price movements of these commodities on exchanges do not hurt him directly. For an average Indian, price of gold becomes important only when he decides to make a purchase on special occasions.

Although the world's largest consumer, India has little control over movements in international gold prices.

As for crude, the mechanism of administered prices ensures that the common man has no say in the matter of price. But it may be instructive to remember that almost all the transactions of crude on the exchanges are speculative in nature. Seldom is delivery given or taken. A delivery window is of course provided as required by law.

It is unclear what purpose is served or who is intended to benefit from futures trading in this commodity.

Other commodities, particularly agricultural commodities, are expected to gain importance helping their price discovery process, thereby providing an opportunity to farmers, traders and consumers to obtain reasonable price, the Survey has said.

Inflation politics

The basis on which the Government has expressed optimism over agricultural commodities gaining importance is unclear. Already inflation, caused by sharp rise in prices of primary food products, is a subject of hot debate.

The Government is under pressure from almost everyone including political allies. New Delhi had to de-list two pulses (tur/arhar and urad) from the futures exchanges as part of a series of restrictive measures to discipline the market.

There are also apprehensions of other sensitive commodities like wheat and sugar getting de-listed. With such restrictive measures looming large, futures trading transactions are poised to shrink.

It is of course possible that market participants will move on a large-scale to trade minor or narrow commodities such as guarseed, guar gum, mentha oil and so on. In the event, such commodities will show extraordinary levels of turnover bearing no logical relationship with physical output.

The Economic Survey has overlooked the `political risk' that this market faces. The risk is unlikely to go away anytime soon, especially in the context of the changing political scenario in the country. The rabi harvest will of course bring some relief; but it would be temporary. Market participants cannot afford to ignore the ground realities.

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