The important question of agricultural, including futures, markets is being raised. To an economist, markets are about what the Austrians called tatonnements and equilibrium prices. A national market is one such structure. This aspect is being ignored, apart from the work of economists like AM Khusro, DS Sidhu and Madhoo Pavaskar. We try to put some flesh in this idea. Commodity trading restarted recently. There are four national commodity exchanges—Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi-Commodity Exchange (NMCE) and Indian Commodity Exchange (ICEX). Indian markets have thrown open a new avenue for retail investors and traders to participate: commodity derivatives. With the setting up of multi-commodity exchanges, retail investors can trade in commodity futures without having physical stocks. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing a portfolio diversification option. The size of the commodities markets in India is significant. Of the country’s GDP of Rs 13,20,730 crore, commodities-related (and dependent) industries constitute about 58%. Currently, the various commodities across the country clock an annual turnover of Rs 1,40,000 crore. Like any other market, the one for commodity futures plays a valuable role in information-pooling and risk-sharing.
The government has essentially made commodities eligible for futures trading, but the nationwide exchanges have earmarked only a select few for starters. The argument used against futures and price discovery, which is the only logical basis for commodity financing, is that markets are thin and allow cartelisation and perverse speculation. The answer to thin markets is to strengthen them, and until then, regulate them. It is not to ban price discovery. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities, in allowing futures. While NMCE has most major agricultural commodities and metals under its fold, NCDEX has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading.
Unfortunately, there has been practically no retail avenue for punting in commodities. Commodities offer potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand equity markets, may find commodities unfathomable. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing a substantial portfolio diversification option. The decision to allow brokers to operate in both stock and commodity markets is a step in the right direction.
The argument against ‘speculation’ is to reform the market and regulate it, not to discourage efficient working. Fortunately, Sebi has issued a circular setting up position limits on agri-commodities so that runaway agri-futures do not disturb prices in spot markets. Sebi has established these limits on the basis of recommendations of Commodity Derivatives Advisory Committee. The e-NAM (National Agriculture Market) needs preparatory steps. In 13 states, 417 APMCs have been unified and 168 more will be added soon. But if finance is denied for collecting price statistics, the idea will remain a non-starter, like many ‘clever’ schemes for the kisan. Hopefully, the provisions made in the Union Budget will provide for this.
The BE for this was Rs 15,085 crore in 2016-17, but the RE was lower at Rs 13,741 crore and the BE of 2017-18 of Rs 3,585 crore may need to be raised later. Companies that have built storages and are providing agro support infrastructure need to be supported and more such groups created. There has to be recognition that a warehouse receipt is excellent collateral and can be traded. But rural-urban projections still ignore this great dynamic of the rural-urban continuum as we call it in our Future of Indian Agriculture. There is no recognition of agricultural infrastructure there. The problem here is the operation of our systems in silos.
Ministries and departments in urban development, agricultural cooperatives and marketing, roads, company affairs, banking and industry (for agro-based industries) need to coordinate. It’s not easy, but can be done with determination and clear directions. This kind of planning will require an empowered task force, possibly in the NITI Aayog, and with a nodal ministry, say, agriculture. While some investment will be in the public sector, it will largely be a PPT arrangement. Guidelines will have to be developed since this is a State subject. Let us hope for real progress.