The mission is expected to submit its report early next year, giving rise to the fond hope that the new millenium may usher in rapid development of futures trading in a wide range of commodities in which the FMC has already initiated and intends to commence such trading in the coming months.The appointment of such a fact-finding mission was, no doubt, overdue. The recommendations of the mission would therefore now be awaited eagerly by the FMC as well as the commodity exchanges.

But while awaiting these recommendations, there seems little reason to put off some of the obvious immediate steps like weekly clearings, abolition ofspecial margins, liberalisation of the daily limits on price fluctuations and trading, and dispensing with the requirement for registration of non-member clients with the FMC, to boost trading volumes to some extent in commodity futures contracts. As a matter of fact, these types of regulatory measures are already in vogue at the country's stock exchanges which are far more vulnerable to speculation, from individuals as well as institutions, than the commodity futures markets.

In fact, whereas the stock markets hurt badly the innocent investors, the commodity exchanges may affect adversely the fortunes of at the most businessmen -- be they hedgers or speculators - who are not altogether averse to price risks. Yet, the stock exchanges are subject to far more liberal regulations than those introduced by the FMC in commodity exchanges, even though the speculative trading volumes in the former are several times those in commodity exchanges.

Hence, the introduction of suitable measures at liberalisation ofregulation in commodity futures markets brooks no further delay, lest the futures markets wither away, before the fact-finding mission comes up with its belated recommendations.

These immediate steps aside, there are quite a few long term measures, on which the authorities must set on action in the near future to lay a strong foundation for the development of commodity exchanges in the country. Over the last four decades, in their wild goose chase at achieving the socialistics of pattern of society, the governments at both the Centre and the States have destroyed the competitive market structure in major commodities to such an extent that it would take quite some time before it is restored to its pristine glory to perform its vital role in orderly and efficient marketing of agricultural produce and their products.

After all, the most basic precondition for establishing a successful commodity futures market is a large, competitive and vibrant cash (spot) market functioning with considerable transparencywith respect to its dealings and pricing. Unfortunately, the prevailing cash markets in most commodities fail to satisfy in great measure this precondition.

True, most regulated markets in primary agricultural produce fulfill to a significant extent this precondition. These markets where produce is sold largely by auction, or, at times, some other forms of competitive bidding, a high degree of transparency exists, though they mostly lack infrastructure for proper storage, scientific grading and dissemination of market information.

But after the primary produce is sold in the regulated markets, the subsequent distribution channels are almost devoid of transparency in terms of both trading and pricing.

The discriminatory industrial, fiscal and credit policies adopted since the onset of the planning era to usher in developnment of small scale industries and the balanced regional development has inevitably led to fragmentation of markets in different regions in such a way that most farm produce serves asraw material to the local, inefficient small scale units. As a result, in most commodities like cotton and oilseeds or their products, national markets hardly exist, except for residual surpluses.

Although this fragmented market structure underlines the need for development of regional domestic commodity exchanges, one cannot but lament that small fragmented local markets have also given rise to the mushroom growth of small traders all over, resulting in most cash or spottrading being shrouded in secrecy and suspicion.

It may perhaps be asked: Why is it necessary to have an udnerlying vibrant and transparent spot marke to develop a successful commodity exchange? The answer is obvious. The economic utility of a commodity futures market for price discovery and risk management presupposes a strong correlation between the spot and futures prices, subject to carrying costs, either positive or negative, depending upon the yield on stocks which varies inversely with the volume of stocks, and reduces, or eveninverses, the actual carrying costs.Without high and statistically significant correlation between the physical and futures markets, the futures contract is unlikely to attract either hedging by market functionaries or speculation for price discovery.

So long as the physical cash market remains opaque and shrouded in mystery, the `basis' risk, arising from possible dissimilar, or even divergent, movements between the cash and futures prices, may not only vary greatly among different market functionaries, but more often than not be quite large, dissuading such functionaries from hedging their price risks in the futures market.

Hence, in the absence of reasonably high, if not total, transparency in trading, pricing and stock situation in the physical market, the futures contract will be unable to perform its price making function on a real time basis, affecting adversely in the process of its hedging utility and efficiency as well. It is true that, in isolation, neither the FMC (or its parent Ministry ofConsumer Affairs), nor the commodity exchanges would be able to develop vigorous and more trnsparent cash markets in major commodities, with adequate infrastructural support. That would call for several changes and reforms in government policies relating to industrial development; central, state and local taxations; marketing rules, regulations and practices; and bank finance and credit systems.

While several ministries need to cooperate for the purpose, the FMC, under the helm of the Union Ministry of Consumer Affairs, can probably take the useful lead in the matter and chalk out a time-bound action plan. The commodity exchanges, in turn, can also take steps to gather and disseminate market information from various regulated markets, customs offices and other public or private sources.

Reviving commodity futures exchanges through developed cash markets However, it is idle to see action on all these fronts before the dawn of the next millenium. But some beginning needs to be made somewhere here and now,if the authorities were really serious of developing futures trading activity in major commodities to enable the Indian trade and industry to face the ensuing challenges posed by the envisaged WTO trade liberalisation regime and yet remain competitive through efficient price risk management.Meanwhile, the FMC must at least make an early move to remove the existing anachronistic legal fetters under the antiquated Forward Contracts (Regulation) Act, 1952 (F.C.(R) Act), which are not only irrational and impractical, but have also contributed significantly to the prevailing widespread secrecy surrounding the physical market transactions in most commodities.

By far the most important barrier is the current absurd definition of the term `ready delivery contract' in the F.C.(R) Act, which requires the delivery of goods and the payment of price within II days from the date of the contract. This is not all. It also prohibits the delivery by tendering of any document of title to goods like a warehouse receipt or arailway receipt which the seller may have acquired by purchase, exchange or otherwise from any third party.

In other words, the law requires that the seller must be in the physical possession of the actual goods which alone he can tender by means of his own document of title to goods. And since the document of title too goods received against a ready delivery contract is no more tradeable for a subsequent ready contract, the buyer is left with little option but to arrange for the acceptance of the actual goods covered by the title document.Several difficulties crop up in adhering to this archaic law. For one thing, considering the loading and unloading time at the seller's godown and at the truck or rail terminal, transport bottlenecks and delays, transhipment needs and waiting at octroi and check points, physical delivery can rarely be completed within the stipulated period of II days. And since remittance can only follow the actual receipt of the goods or the document of title thereto, the payment is alsoalmost impossible within II days.

After all, even if delivery were issued by title documents, these require to be first transmitted through banks (including intermediate `correspondent' bank), while the remittances will be made through the same banking reverse procedure on receipt of the documents by the buyer. In short, it would be truly a wonder, if a ready delivery contract is performed within II days. Consequently, it may not surprise anyone if the ready contracts in commodities covered by the F.C.(R) Act are far from transparent in terms of both pricing and trading quantities.

At the same time, the restrictions on tendering title documents of goods acquired by purchase, exchange or otherwise run counter to the present fervent desire of the authorities to introduce a tradeable warehouse receipt system for deliveries against futures contracts. Clearly, before attempting to introduce any such system (which is currently fraught with many pitfalls), the definition of `ready delivery contract' in theF.C.(R) Act must be modified at the outset.

Actually, for the development of a vibrant cash market, the ready delivery contract also needs to be made quite flexible with respect to not only the time for delivery and payment of price (incidentally, the Kabra Committee has unequivocally recommended the extension of time limit to 30 days), but also mutual settlement between the parties as the situation may warrant. To be fair, let the ready or spot contracts be governed by the Indian Contract Act, the Sale of Goods Act and the laws relating to specific performance, instead of bringing it into the strait-jacket of the F.C.(R) Act.In the interest of developing a thriving and transparent cash market, the FMC must be magnanimous enough to give up its indirect reins over the ready delivery contracts in commodities, in which futures trading is allowed.The Essential Commodities Act which is not infrequently resorted to by the government at the drop of a hat to impose stock restrictions on market functionaries toomilitates against a free and fair cash market. With such restrictions, the physical market just gets underground and becomes virtually invisible. Even when the Essential Commodities Act is not invoked, with its sword hanging over the trade, it is customary for the authorities to view stocks as hoardings. In such a situation, it is naive to expect merchants or manufacturers to trade freely and openly in the cash market and hedge their huge accumulated stocks in a futures market. Small wonder, efforts made some years back by the South India Cotton Association at Coimbatore to organise spot trading in its trading hall failed miserably.

Hence, to activate the commodity futures markets in the country, the regulating authorities should remove commodities subject to futures trading from the purview of the Essential Commodities Act so as to build sound and transparent cash markets.

No doubt, the full-fledged development of cash markets in commodities chosen for futures trading may take quite some time, as thatwould need changes in government policies in several directions (which only the next government after the coming Lok Sabha elections can bring in). In the meantime, the concerned ministries may at least prepare the necessary groundwork for the purpose. The FMC must set in motion immediate action to draw an appropriate plan.Otherwise, even after another decade, in the absence of active and transparent cash and futures markets, marketing margins in most commodities may continue to remain wide to the detriment of both the producers and consumers.

The author is an independent consulting economist