The Hindu Business Line : Futures trading — Why the panel may be flummoxed

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Futures trading — Why the panel may be flummoxed

The futures platforms offered not only a firm and timely indication of the prices to expect at harvest but also an ironclad assurance that farmers will be able to collect the payment.

Sharad Joshi

At the end of the discussion on the price situation in the Rajya Sabha on April 17, as the Minister for Agriculture, Mr Sharad Pawar, came to the end of his reply, a question was raised from the Left benches about the Government’s position on the forward markets. In reply, Mr Pawar mentioned that an expert committee appointed under the Chairmanship of Prof Abhijit Sen had been deliberating the issue for 14 months and was yet to submit its report, though it was to have done so in its report in the stipulated two-three months.

The Minister said that if the report was not submitted within the next 10 days, he would call for a meeting of experts on the subject and take a final decision on the future of futures trading, in the light of the severe opposition to these markets reflected during the discussions in the Rajya Sabha and in the recommendations of the Standing Committee on Agriculture on the subject. Coming from a politician and statesman of Mr Pawar’s vintage, this was an unusual statement.

Even presuming that Prof Sen’s panel had failed to show the necessary alacrity in respecting the time schedule, it would be unfair to decide the issue outside the Committee and punish the innocent market and the farmers for no fault of theirs.

Further, one wonders why the Minister took the trouble of appointing a Committee if he knew knowledgeable people who could be called for consultation.

Little innovation

Throughout the discussion in the Rajya Sabha, the Minister dealt at length on the efforts the government was making to ensure food security, by restricting exports and facilitating imports, and the mechanisms of CACP (Minimum Support Prices), Food Corporation of India (FCI) and the Public Distribution System (PDS). This, by itself, suggested that the government was thinking more of the traditional means of ensuring food security rather than experimenting with innovative and little understood mechanisms.

The statement by the Minister of Agriculture seems to have made Prof Sen’s position even more difficult. Last year, at about the same time, the matter of the utility, or otherwise, of the futures markets was brought to him for examination. Even though the terms of reference of the Committee did not so suggest, it was obvious that the government was apprehensive about what the futures market could bring in.

It was quite clear that the futures market was an unwanted baby — of a different gender from the licence-permits-quota type of market systems that the government had carefully nourished till then. Prof Sen’s problem was that the baby was indeed of a different gender but, despite the crude attempts at getting rid of it, was alive and kicking and threatened the basic structure of the traditional agricultural marketing policies based on CACP-FCI-PDS.

Terms of reference

The terms of reference of the Abhijit Sen Committee, as distinct from the unwritten agenda of the Government, were benign. The Committee was appointed in March 2007 to

i) study the impact of the operation of futures markets on commodity prices;

ii) suggest methods to minimise such impact, and

iii) recommend ways in which the farmer’s participation in the futures markets can be increased.

It was not the case that the futures market possibly had an inflationary effect. The problem was that forward trading and the futures markets resurrected by the NDA government go against the Central Government’s policies since Independence in respect of commodity markets based on Minimum Support Prices, procurement from Food Corporation of India and the Public Distribution System in the name of the weaker sections.

The opposition of the Left parties to the futures markets came essentially from the conviction that it belonged to the wrong — liberal — gender. It was hoped that the Sen Committee would give them the authority to abort it.

The mandate of the Sen Committee is simple enough. It is intriguing why the Committee is taking such a long time to submit a report which, it had been thought, could be submitted in just 90 days. The problem seems to be as follows. The Committee found little evidence to suggest any links between market price hike and volatility that could be directly linked to the operations of the futures markets.

Under these circumstances, all that the Committee had to do was to make recommendations about how the performance of the futures markets could be further improved by sanitising the spot markets, improving finance to the commodity markets and promoting farmers’ response by facilitating it.

Uncomfortable facts?

It is not that the panel was to study the desirability or otherwise of lifting/continuing the ban on the futures trade. The futures trade was resurrected in 1993 and, at least, three multi-commodity exchanges are doing pretty well with geometrical expansion of the volume of transactions.

Further, it shook up established notions that the commodity market should be eternally based on three pillars of CACP, FCI and PDS.

The Commission for Agricultural Costs and Prices (CACP) that would help determine the Minimum Support Prices; Statutory Minimum Prices are also, by corollary, the procurement prices;

The Food Corporation of India (FCI) that manages procurement of foodgrains and their conduit to different States; and

The Public Distribution System (PDS) that would ensure retail distribution according to decisions taken by the Government.

If the Committee submitted its honest findings the government would be forced to permit the normal delivery of the futures market infant. The problem for the Committee, probably, is that that would raise a number of very inconvenient questions that would make the candid recommendations unpalatable to the Government.

What purpose would the CACP serve in a situation where the futures market platforms offered not only a firm and timely indication of the prices to expect at the harvest but also provided an ironclad assurance, as also insurance, that farmers would be able to collect the prices? Further, since the commodity markets in India provide warehousing facilities, banking and finance, insurance as also negotiable warehousing receipts, what function would be left to justify the existence of Food Corporation of India, which had become notoriously unpopular with the farmers, most of whom see it as both inefficient and expensive? Lastly, with the procurement of the foodgrains decentralised, was it really necessary to create a separate PDS network for the benefit of the weaker sections of the population? Would that purpose not be better served by simply mailing the targeted people food stamps or smart-cards, which would also obviate the substantial diversion of foodgrains from the PDS system?

(The author is founder, Shetkari Sanghatana and Member of Parliament — Rajya Sabha. He is also a member of the Abhijit Sen Committee on Futures Trading, and can be reached at sharad.mah@nic.in)

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