Academic apathy towards commodity markets

There has been less than essential attention to research on commodity derivative markets in India. The cream of the academic community has ignored this market, resulting in quality of research being way below international standards.

As a result, while academic research has progressed substantially in India in other domains of economics and finance, there has hardly been a paper published in a top-tier journal by an academician from an Indian institution on commodity economics.

Trained financial economists, somehow, feel that Indian commodity markets are inflicted with fewer complexities of institutional structures, low depths, comparatively simpler and lesser number of traded instruments, too many regulations, and few product innovations.

These do not really render much potential for publication in international finance journals.

Therefore, often policy questions on Indian financial markets are dealt with through subjective perceptions and some initial findings based on overtly simplistic mathematics without really delving into the crux, complexity, and theory underlying the problem.

Research on commodity derivative market in India dates back to the 1930s, with research on cotton futures market in Mumbai by Prof ML Dantwala. In the 1960s, Venkataraman published his book on the theory of futures trading. At around the same time, a host of articles and books were published on commodity derivatives markets in India, authored by Pavaskar.

Regional Concentration Most of this research was concentrated in the western part of the country. This is because of the existence of the buoyant commodity derivatives markets along with knowledgeable traders in the Mumbai-Ahmedabad belt – presenting a “lethal” combination of attraction for researchers in the western part of the country.

The erstwhile nature of the research remains significant even today, considering the historical documentation of the working of the markets.

They reveal hard work in the collection and analysis of field-level data, sound knowledge of the markets, and simple expositions revealing a very high teaching content.

No doubt that the “masters” of yore in western India knew their subject and would make it understandable to the general public with utmost ease.

However, there is doubt if such research, mostly published in non-peer reviewed mediums, would have qualified for publication in top international journals of today, where publication has to comply with a certain standard of quantitative rigour.

Unlike the universities and institutions in Delhi (or even Kolkata), economics programmes in many other parts of the country realised the need for rigorous quantitative tools such as applied mathematics, and econometrics much later. The rigour of research in DSE or ISI were so very competitive and comparable with the US universities that George Akerlof visited ISI Delhi in the 1960s and conducted his research on the “Market for ‘Lemons’” that was supposed to fetch him the Nobel Prize in Economics in 2001.

However, that did not help in creating much interest about research on the dynamics of commodity markets in the elite Indian academia.

Drying out of Research While commodity derivative research never really took off in Delhi, even in western India, the interest practically dried down after the 70s, triggered by the ban on commodity futures trading.

This ban was driven by the feeling that such trading was in contravention with the philosophy of socialistic pattern of development, and inflationary.

There did not seem to be any valid academic assessment to buttress such a contention. In any case, commodity research practically died in absence of a commodities derivative market.

With the revival of commodity trading through setting up of national level commodity exchanges in the new millennium, there was a renewed interest in research in this domain.

Most of these researches have borrowed the enquiry framework of the equity market without really delving into the nuances of the commodity markets.

As a result, what is taking place is way below par in both quality and quantity terms.

No doubt, there is a considerable need to promote fundamental and theoretical research for development of these markets. The immediate stakeholders – the commodity exchanges and the Government – have to play a role here.

Doctoral level fellowships should be offered jointly in the institutions and universities by the exchanges and the regulator, apart from the commissioned research projects.

Capacity building for research actually takes place at the doctoral phase, and such steps will help a long way in giving a new lease of life to commodity derivative research.

The writer is Chief Economist at Multi Commodity Exchange of India Limited. Views are personal.

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