Agri markets deserve a future

The nascent commodity market in the country is experiencing its first major crisis ever since national exchanges were allowed to operate in 2003. Much has been debated about the events leading to the crisis, the likely outcomes and the regulatory changes required. With the causes leading to the current crisis addressed, the thinking is that all augurs well for the market. Yet, the policy flip-flop that characterises this market and the role of the market in the broader economy has seldom been in focus.

The Government in 2003 lifted the five-decade-old ban on commodity futures transactions and allowed the private sector to set up national commodity exchanges. The new national commodity exchanges that came up were technologically advanced, brought international practices to the market and created a pan-India market for commodity derivatives.

How these exchanges -- and the much-maligned regulated markets operated by agricultural market committees in the states, accounting for over half of agricultural output sold --- would provide a seamless market for produce in the country never engaged the attention of policymakers. Allow these exchanges to come up and the market will develop around them, was the perception in government.

Island effect

Forward trading fell within the ambit of the Central Government and spot markets in agriculture was within the legislative domain of states; this required a more coordinated approach to policymaking. Not an easy task even in the best of circumstances!

Committee reports, advisory suggestions and benign directions from the Centre, with no tangible move towards the desired market structure, came to characterise the sector. The consequence? Futures markets remain an island with little impact on the broader economy.

Official apathy and limited participation made it easy to blame the commodity futures markets for agricultural productsfor the increasing prices. Had it stopped with this, the damage would not have been serious. Playing to popular sentiments, bans were periodically imposed on commodities trading. Since early 2007, India has witnessed three serious instances of bans, with three commodities still in the banned list! The withdrawal of participants from agricultural commodities to other safer contracts, where government would not intervene, led to near total stagnation of agri-futures markets, to the detriment of the agrarian sector.

The markets today

The commodities markets are characterised by three factors: Physical and futures market in agri commodities are two universes never destined to meet, policy myopia on the market structure suitable for the country, and concentration on trading in non-agricultural commodity futures. It’s a policy nightmare better ignored for the uninitiated and a field rich for reforms if the opportunity is seized and the way forward charted.

That there is no viable alternative to a market-based arrangement for the sale of agricultural produce is not in doubt.

What is the appropriate market structure for the country and how should policymaking, both at the Centre and in the states, support the desired market structure?

First, the prevailing information asymmetry in the market — the seller knowing better about the produce being sold and the buyer knowing better about the prevailing prices — has to be addressed through transparency in market operations and information dissemination to all stakeholders.

Providing a transparent electronic platform for the sale process and dissemination of the discovered prices to all would be the way forward. Isolated but largely unsuccessful experiments by individual states should give way to a unified technology architecture. Needless to mention, the initiative has to come from the Centre.

Second, the fragmented market for agricultural produce — largely the creation of restrictive State-level legislation — will have to give way to a national market.

This will call for easing licensing norms to enable the seamless participation of buyers from across the country, movement of goods without restriction, harmonisation of tax laws and changes in other procedures. Again, the lead has to be taken by the Centre.

Appropriate measures

Third, market-oriented measures are required to prevent distress selling. This entails storage infrastructure, funding of stocks by banks and price certainty in the future so that storage itself does not become a problem later.

While the first two are relatively straightforward, price certainty calls for a conscious integration of the physical market with the futures market. Such a move would make the futures exchanges relevant to the broader economy. However, the benevolent hand of the Central and State governments is critical.

Fourth, continuous participant education is very important. The changing market structure is likely to frighten participants, especially farmers, unless they are supported to operate in this market.

This will pose a monumental communication challenge, but if bodies such as the Election Commission are able to rise to the occasion, there is no reason to shy away from attempting this task.

Lastly, we need an appropriate regulatory environment, balancing the requirements of the physical market and the futures market.

While State legislations should be reviewed to support the market structure envisaged and provide for a more robust regulatory set-up, the law governing derivative markets requires strengthening.

A decade of operations of derivative exchanges with a regulatory structure that is wanting certainly does not show the country in good light!

Will policymakers seize the opportunity to rebuild the agri market structure of the country? Or will we continue to bumble along?

(The author is former MD & CEO, NCDEX.)

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