The Hindu Business Line : Pulses de-listing downplayed

The chapter on "Commodity futures market", says: "A temporary ban was imposed on futures trading in urad and tur dal in January 2007 to ensure orderly market conditions."

It is common knowledge that the Government came under intense pressure from various segments over rising prices of essential food products, including pulses and was forced to take the negative decision.

Market conditions

If orderly market conditions did not exist prior to de-listing of the two pulses, as can be inferred from the Survey, the market regulator (Forward Markets Commission) will have a lot of explaining to do. It is also necessary for the stakeholders to know what corrective steps are now being contemplated to bring back orderly market conditions.

The Survey quotes from a 1987 report "Stabilising speculative commodity markets" and points out that an efficient and well-organised commodities futures market is generally acknowledged to be helpful in price discovery for the traded commodities. In other words, what is necessary is a well-developed and effective futures market.

According to the author, futures market, as observed from the cross-country experience of active commodity market futures, helps in efficient price discovery of the respective commodities and does not impair the long-run equilibrium price of commodities.

It may be instructive to remember that countries such as the US and Malaysia, where futures trading is a thriving organised industry, are surplus producers of the commodities traded on a large scale.

Ninety per cent of palm oil produced by Malaysia is for the export market. Nearly, 70 per cent of soyabean, corn, wheat and cotton produced by the US are genuine surpluses intended for the export market. The futures market in these countries is efficient because of a well-developed physical market, transparent flow of market information and strong regulatory oversight.

In India, the conditions are far from satisfactory. Shortages, constricted cash market and tardy flow of information characterise the market. The regulator lacks autonomy and authority.

Tangible benefits

It may be interesting to revisit the debate whether futures trading actually delivers tangible benefits to primary producers and real consumers in developing countries facing serious shortages of essential food products.

Interestingly, the report itself acknowledges some weaknesses of the market.

"At times, price behaviour of a commodity in the futures market might show some aberrations reacting to the elements of speculation and `bandwagon' effect inherent in any market. The Survey also recognises that an effective architecture for regulation of trading and for ensuring transparency, as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimise price shocks triggered by unanticipated supply demand mismatches."

The policymakers will hopefully take cognisance and initiate steps to strengthen the market, both physical and derivatives.

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