Whereas the ready delivery contracts are quite common in the retail trade as well as in the up country assembling markets for agricultural produce, the NTSD contracts account for the bulk of the distribution trade in the cash markets, both in the domestic wholesale business at the terminal markets and in the export-import deals.

To be sure, NTSD contracts are sine qua non in the marketing of agricultural commodities and their products. After all, no business can be carried out on hand to mouth basis all the time. Nor do, given the choice, businessmen would like to hold huge stocks, which entail large storage andinterest costs. Under competitive conditions, just-in-time deliveries are preferred to large inventories to save on storage.

Merchants and manufacturers therefore choose to keep their stocks to as low a level as possible in order to minimise the trouble and expense involved in warehousing. The NTSD contracts provide them precisely with such a vital tool which serves efficiently their requirement of inventory control. The NTSD contracts also enable both the buyers (mostly processors and manufacturers) and sellers (mainly merchants and stockists) to lock in the prices of the goods they eventually need to acquire or dispose off, before they physically receive or deliver them.

In the process, they avert the price risks as well, since the subsequent price variations do not affect adversely their purchases and sales already contracted through the NTSD contracts, provided such purchases and sales have been effected at prices that ensure their normal trading, processing or manufacturing margins. The NTSDcontracts thus serve as an effective risk management instrument too, and act as an alternative to the hedges in the futures markets.

Yet, more often than not, futures contracts actually supplement the NTSD contracts. The latter do not always supplant the former. This is because the uncovered NTSD contracts (i.e. the NTSD sales not covered by either physical stocks or equivalent NTSD purchases, or the NTSD purchases not covered by the corresponding sales of agricultural produce or their equivalent products) involve considerable price risks, which the merchants and manufacturers need to cover by entering into appropriate hedge contracts in the futures markets, depending, of course, on their risk perceptions and hedging costs.

Surprisingly, despite its immense economic utility to the trade and industry in the orderly distribution and storage of most commodities and their products, as also in the long term production and business planning, NTSD contracts in almost all major commodities have been eitherprohibited altogether, or regulated rigorously under the Forward Contracts (Regulation) Act (F.C. (R) Act), 1952.

At present, such contracts are banned completely all over India in as many as 79 commodities which include all cereals and pulses, most of the edible oilseeds, oils and oilcakes, quite a few spices and precious metals like gold and silver. In another 15 commodities, including major oilseeds and oils, fibres and fibre products and jaggery, such contracts are regulated.

Even among these 15 commodities, trading in NTSD contracts is totally suspended in 12, and permitted with regulation under the auspices of the recognised associations in barely three commodities, namely, raw-cotton, raw-jute and jute goods.

As a matter of fact, the F.C.(R) Act as originally conceived by its framers had recognised the important role of NTSD contracts and had therefore deliberately kept them out of its regulatory ambit, though due to the then widely prevalent socialistic misapprehensions, the Centre was empoweredto apply the prohibitory or regulatory provisions of the Act in exceptional circumstances in the interest of trade or public interest.

In actual practice, however, no sooner did the Centre began to ban futures trading in major commodities in the fond hope of curbing inflation in the economy caused by deficit financing and recurring farm shortages, it also prohibited or suspended trading in NTSD contracts in them in the erroneous belief that such contracts would be misused for speculation.

Even in a few cases like cotton where such contracts are under regulation, neither are all the varieties permitted to be trade simultaneously, nor are such contracts permitted beyond specified short periods. Again, not all the recognised cotton associations are allowed to trade in all the permissible varieties.

Considering the economic usefulness of the NTSD contracts in the orderly marketing and pricing of commodities, the blanket ban, or even regulation, on trading in such contracts in major primary commodities andtheir products have only added to the overall marketing costs for the private trade and industry. For, in the absence of such contracts, the market functionaries are either required to hold large stocks (if stock limits are not fixed by the authorities under the Essential Commodities ACt), or make frequent hand to mouth purchases.

Alternatively, they are constrained to undertake surreptitious secretive deals costs and margins tend to escalate to the detriment of both the farmers and consumer, in whose interests the NTSD contracts are supposed to be prohibited or regulated paradoxically enough.

Be that as it may, it is indeed hard to believe that in view of the prohibition or regulation of NTSD contracts in major farm produce and their products, the physical trade in commodities is now being carried out by means of only the ready delivery contracts of two days duration. it appears that most merchants and manufacturers must be entering into NTSD contracts by simply adjusting suitably the contract as well asthe delivery and payment dates, so that such contracts look on paper as ready delivery contracts.

The absurd regulation of NTSD contracts thus seems to have driven the commodity trade to adopt dubious means to avoid the possible violation of the provisions of the F.C. (R) Act. Worse still, even the poor housewives purchasing their regular requirements of cereals, pulses, edible oils and spices from grocers or retailers by taking delivery either across the counters or at home, but making payments after II days, would also be deemed to be entering into NTSD contracts in contravention of the F.R. (R) Act.

Actually, NTSD contracts are not far different from the ready delivery contracts, except for the time element involved in fulfilling the contracts. While the latter are required to be performed within 11 days, the delivery of goods and the payment of price in the former are always effected after 11 days.

As the Forward Markets Review Committee, headed by India's pre-eminent agricultural economist, late MLDantwala, had observed, ``It is not correct to base the system of social regulation of the different types of contract by reference to a relatively minor characteristic (deferred delivery) that has little meaningful distinguishing value.''

Recognising the importance of NTSD contracts in the bulk of the distribution from the assembling stage to the final stage of industrial consumption or exports, the Dantwala committee had unequivocally recommended that these contracts should be left outside the purview of the FC(R) Act.

Incidentally, the authorities, which have of late found considerable merit in the practices prevalent in the US commodity exchanges and are keen for their blind adoption by the Indian futures markets (unmindful of the ground realities in this country), should not lose sight of the fact that the Commodity Exchange Act of USA, which regulates futures markets in that country, specifically excludes ``any sale of any cash commodity for deferred shipment or delivery'' from the term ``futuredelivery,'' and excludes all such cash contracts for deferred shipment or delivery from the purview of that Act.

By the way, since the government of India has now realised the need for futures trading in major commodities like fibres and fibre products, edible oilseeds and their products, and may soon even permit future trading in most other farm commodities, as also precious metals, there appears little reason to continue the prohibition or regulation of NTSD contracts in commodities. With the due recognition and revival of futures trading, speculation is obviously no longer an anathema to the authorities. Moreover, with the anxiety of the authorities to augment speculative volumes in the recognised futures markets, their fears of NTSD contracts being misused for speculation hardly hold any water now.

In fact, once NTSD contracts are freed from all regulations, not only would such transactions be entered into more openly, but also hedged in the commodity exchanges freely, improving thereby the hedgingactivity in the futures markets.

Clearly, the time is now ripe (though it was in fact long overdue) to remove the NTSD contracts lock, stock and barrel from the purview of the FC(R) Act.

As it is, the present definition of NTSD contract, which forbids the transfer of any document of title to goods like warehouse receipt, runs counter to the avowed intention of the government to promote the use of warehouse receipts for issuing deliveries against the futures contracts.

What is, however, disturbing is that instead of deregulating the NTSD contracts and making the documents of title to goods received under such contracts tradeable and negotiable, the government is understood to have proposed an amendment to the FC (R) Act to prevent the performance of such contracts by tendering of documents of title to goods acquired by the seller through purchase, exchange of otherwise.

That would be a retrograde step without doubt and give a death blow to the proposed warehouse receipt system, albeit unwittingly.

Tobe fair, as the World Bank report on futures markets in India observes ``forward trade between two parties is quite common in other countries, but in contrast to India, considerable flexibility is normally built into these contracts.

For example, a seller is normally allowed to deliver products of comparable quality if his/her own production has fallen short. Contracts can be liquidated (``washed out'') with final payment between buyer and seller (representing price movements over the life of the contract) taking the place of contract delivery.

Postponements are not a real problem, with premiums or discounts on the original price often directly calculated from futures market prices.'' (See `India - managing Price Risks in India's Liberalised Agriculture: Can Futures markets Help?', The World Bank, 1996, P 11 , footnote 3).

Disappointingly, instead of taking a cue from the World Bank report, the regulatory authorities in India are seeking yet another amendment to the FC (R) Act to prevent the settlementof NTSD contracts by payment of money differences or any other means whatsoever, which dispenses with physical delivery of goods and payment of full price thereof, irrespective of the underlying supply and demand situation.

That would evidently create more problems for the trade and industry in times of crisis, and could hardly ease the situation. A better course would be to level it to the parties to the contracts to resolve their problems by recourse to the existing legislations on contracts, sale of goods and specific performance.

To be sure, with the envisaged globalisation of India's commodity trade in the coming third millenium under the WTO regime, deregulation of NTSD contracts to render them quite flexible is now indeed imperative.

That would also lead to development of ``on call'' or unfixed contracts (described as executable orders or price-to-be-fixed contracts abroad), where delivery is made immediately, but the price is ``called'' or fixed and paid later.

These contracts can help farmersto receive better ``off-season'' prices and save them the hassles and costs of storage.

More importantly, the deregulation of NTSD contracts would also help develop the cash markets in commodities and thereby activate the dormant futures markets as well.

True, the necessary amendments to the FC (R) Act for the proposed deregulation must await the ensuing Lok Sabha elections and the installation of the new government at the centre.

But, in the meantime, the authorities can set the ball rolling by annulling the application of Sections 15 and 17 of the FC(R) Act to the NTSD contracts in various commodities.

That would go a long way in improving the economic utility and efficiency of both the physical and futures markets in commodities.

(The author is an independent consulting economist)