Agri Business

Govt policies are growth inhibitors of commodity futures

M. R. Subramani | Updated on May 27, 2013 Published on May 27, 2013

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It is over a decade since the Government allowed futures trading in commodities. In the years that have gone-by, commodity trading has grown by leaps and bounds, though there was a drop in the value of trade last fiscal.

In 2012-13, the value of futures trading dropped to Rs 170 lakh crore from Rs 181 lakh crore the previous year.

This could be attributed to the ban on guar futures that had single-handedly lifted the turnover by 50 per cent during 2011-12. Besides, a drop in farm products prices and costlier gold too contributed to this trend.

In April this year, futures trading have showed signs of bouncing back with the value rising to Rs 14.77 lakh crore against Rs 11.52 lakh crore the same period a year ago. Bullion and farm products’ futures, too, are showing a rising trend.

Journey of futures

Commodities futures trading in the country dates back to 1875 and had a glorious run between the First and Second World Wars before being banned. Again after Independence, it spread its wings before the Government banned as it felt too much of speculation was leading to higher prices.

Socialism and a closed economy also helped the Government’s cause before it began reviewing its situation in 1980. However, a total change of attitude set in after the Government ushered in liberalisation in 1991.

As part of the economic reforms, the Government appointed a committee headed by Prof K.N. Kabra to look into futures trading. The committee gave its recommendations in September 1993. The irony of the committee’s recommendation was that Kabra dissented with the majority’s view to allow futures trading. He was, in particular, against allowing futures in essential commodities. But the majority’s view to allow futures trading in a host of commodities prevailed.

In April 1999, the Government allowed futures trading in oils and oilseeds with the Soyabean Processors’ Association of India getting permission. It was permitted to launch futures in soyabean and its products.

In 2002-03 Budget, the Centre said it was firm in its resolve to put in place a proper mechanism for futures trade in farm and agricultural products. Thus, a notification was issued on April 1, 2003 wherein various commodities could be trade in one exchange.

This led to the birth of exchanges such as the National Commodities and Derivatives Exchange, Multi Commodity Exchange and National Multi Commodity Exchange. In the last couple of years, ACE Derivatives and Commodities Exchange and Indian Commodity Exchange have also come into existence.

Commodity futures trading turnover is 70 per cent of the turnover witnessed in equities. It can, in fact, outperform equities but for lack of initiatives from the Government.

One of the factors inhibiting growth in futures trading is the delay in getting Parliament’s nod to amendments to the Forward Contracts (Regulation) Act, 1952. The amendment Bill has been pending for almost a decade now. The change in the Act will help usher in options trading in commodities. This will ensure participation of growers in futures trading.

Key issue

The other major problem affecting futures trading is Government ad hoc policies of banning futures. In 2007, when prices of wheat, rice and pulses soared, it banned futures trading in these commodities. Subsequently, it allowed futures in wheat but the ban remains on rice and pulses. Similarly, it resorted to a ban on sugar futures too when prices surged before lifting it a few months later. Rubber, soyabean and potato have also gone through such process.

The Government’s decision to impose commodities transaction tax on non-agricultural commodities is also seen as a dampener. Still, increasing population and demand are seen as indicators of bright prospects for commodity futures.

Published on May 27, 2013
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