The spectacular growth of commodity futures trading in India has not been able to deliver the perceived benefits of better price discovery, reduce price volatility, and offer hedging and other tools for risk management, according to the chairman of the expert panel, Abhijit Sen. A majority of farmers in India have not benefited from futures trading, their active participation being highly constrained. Though the panel made some suggestions for exchanges reaching out to farmers through aggregators and cooperatives, Sen said, “The likelihood is that very few farmers will themselves be directly able to access the risk management tools developed in future markets.”
He alleged, “Exchanges are evidently creating contracts that seek to attract speculators rather than serve the hedging need. A part of the problem is obviously the poor state of infrastructure in spot physical markets and associated difficulties of contract design and delivery.” He said that farmers did not gain much from the preceding inflationary episode despite that fact that nine wheat futures contracts being traded in April 2006, which together indicated an over 20% wheat price increase by the end of the year. There were also reports of large private players entering the market to buy wheat above the minimum support price (MSP). While actual harvest prices remained near MSP, procurement by government agencies in 2006 was only 9.2 million tonne, which was 5.6 million tonne less than that in the previous year, even though there was a slightly larger harvest, Sen said.
Sen who is also a member of the Planning Commission, said “Having found no conclusive evidence that futures trading always caused inflation, the panel report has followed the approach of giving such trading the benefit of doubt on the manner of less benign transmissions and to chart out some requirements that would strengthen positive aspects.”
As a chairman of the expert panel, Sen in his note suggested, “The best course of action would be to identify those commodities where there is a possibility of futures trading affecting expectations that may influence inflation in essential commodities and insulate these from futures. The suspension of futures trading in the four essential commodities (wheat, rice, urad, and tur) should continue and in the case of sugar and vegetable oils, discussions with processors held on how much hedging benefits they currently derive from futures markets and a decision taken accordingly.?
Earlier an expert panel headed by Kamal N Kabra was unanimous against futures trading in wheat, non-basmati rice, pulses, tea, coffee, sugar, maize and vanaspati (hydrogenated vegetable oil).
Kabra also gave his separate dissenting note of futures trading. The Guru Committee and the UNCTAD-World Bank joint mission report cautioned against futures trading in rice, wheat and sugar which have substantial government intervention.