The Hindu Business Line : Huge fund flow in commodity futures dangerous

Given the fragmented and fragile nature of Indian agriculture, allowing FIs, FIIs and MFs as well as commercial banks can potentially distort the market.

Mumbai , Nov. 6

IT is amazing how little chambers of commerce and industry know about Indian agriculture and the challenges facing them as also effective solutions.

The plea of the Associated Chambers of Commerce and Industry (Assocham) that financial institutions and foreign institutional investors as also mutual funds should be allowed to trade commodity futures is a case in point.

Arguing that by allowing FIs and FIIs to trade commodity derivatives the overall volumes in the derivatives market will go up drastically, the chamber said the measure would help the institutions to reallocate assets, maximise returns and diversify risks.

In addition to asking for an enhanced role of banks in the credit flow to commodities sector, the chamber has demanded a spot/physical market in agricultural commodities. The major stumbling block for the development of commodity futures market in India is the fragmented physical/spot markets, Assocham has asserted, adding that a national level derivatives market cannot be founded on fragmented localised cash markets.

It is unfortunate, in their enthusiasm to been seen as champions of agriculture and free markets, these representations overlook the ground realities of Indian agriculture.

In the country's rural areas, there are 600 million people who derive their livelihood from farming and related activities. In addition to illiteracy, malnutrition and indebtedness, many of these millions are small and marginal farmers with less than three areas of land.

Fragmented landholding, dependence on monsoon (lack of irrigation), low level of input usage, suspect quality of inputs, poor agronomic practices, lack of rural infrastructure (warehousing, grading/sorting facilities, access roads to markets), poor flow of price and market information all combine to translate to unsteady output, sub-standard quality and fluctuating farmgate prices.

These are the real issues that need to be addressed. We need to strengthen the input delivery system, reduce dependence on monsoon by expanding irrigation facilities, ensure timely and adequate credit delivery, educate farmers about agronomy and enable them to follow pre- and post-harvest scientific practices.

Not only this, we need to build rural infrastructure for warehousing and deliver price and market information to farmers so that they take a call when to market. In other words, enable farmers to become savvy traders.

For addressing these issues, huge investment is necessary. A big step-up in public investment accompanied by private investment is called for to strengthen agriculture. Unfortunately, public investment in this sector, leave alone rising, has actually declined in recent years. These are the real issues that need to be tacked by all stakeholders, including policymakers and chambers of commerce representing business interests. One way to shorten the existing long supply chain and ensure disintermediation (intermediaries that add to the cost but not to the value) is for corporates to get into contract farming.

We need to strengthen the existing spot or physical market; and that can be done only by pumping investment and changing archaic laws relating produce marketing. On the other hand, given the fragmented and fragile nature of

Indian agriculture, allowing FIs, FIIs and MFs as well as commercial banks can potentially distort the market.

Already a part of inflation can be attributed to too much easy money chasing limited farm goods supplies. Inflation hurts every single consumer in the country. Rising prices especially of farm goods or essential commodities is politically sensitive. Worse, there is nothing to suggest that the benefit of high prices (that the consumer ends up paying) goes to the primary producer or grower to any significant extent. Indeed, most farmers continue to get the minimum support price or thereabouts as they do not have facilities to warehouse the produce and sell as and when they want to.

By allowing more money to flow into commodity market, there is the danger of rising prices without corresponding benefits flowing back to those in the farm sector. Intermediaries - traders, speculators - make money, no doubt.

Wheat prices are a good contemporary example. It is sad, not many people realise that the spot market and derivatives market are two sides of the same coin. Derivatives market cannot exist without an underlying spot market. We need to first have sound, vibrant physical market so as to be able to ensure a vibrant and transparent futures market.

Talking about developing a thriving futures market without first addressing the issues of the physical market is like putting the cart before the horse.

Spot market or real commodities (as opposed to paper contracts in the futures section) touch the lives of every single person in the country.

Encouraging too much easy money to flow into commodity market will willy-nilly help traders and speculators, and not primary producers.

Indian agriculture needs non-price and non-trade initiatives. The ability of an average Indian farmer to increase production merely because he is paid a higher price is rather limited. In other words, under Indian conditions, supply response to prices is limited because of the several challenges enumerated earlier.

Without doubt, futures trading has its own benefits - price discovery and price risk management. But to contend that flow of funds into the futures market would help improve the spot market or benefit farmers significantly is to ignore ground realities.

Policymakers have to exercise utmost caution in allowing huge funds to flow into the commodities sector, especially agricultural goods. The ground level problems of farming have to be addressed with right earnest. Conceding to Assocham's demand at this stage in the country's agricultural station could potentially hurt the economy and prove to be counter-productive. The country's priority is not promotion of futures trading, but strengthening the real economy.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Turbulence shifts to south TN; but drenches Chennai

Festive season boosts sales of white goods, CTVs

Sector funds with broader themes provide substantial diversification

India Inc profit growth stays buoyant in Q2 — Margins decline, tax incidence rises

Benchmarks may remain firm

Huge fund flow in commodity futures dangerous

PSBs divided over consolidation move

No unions please, say employees of top BPOs

Broadband base swelling; after-sales services lagging