Assessing opportunities before the budget

Written by Naveen Mathur | Naveen Mathur | Updated: Jun 29 2009, 04:35am hrs
The Indian commodity exchanges have grown steadily since their coming into operation in 2003. There have been ups and downs in this journey but the overall sentiments are very favourable for the growth of the commodities markets in the coming years. At times, there have been discussions in various quarters as to whether the futures markets adversely impact the domestic spot prices of the commodity. The futures markets the world over are primarily used as a platform for efficient price discovery and price risk management. Spot prices are totally dependent on demand/supply calculations. An increase in supplies of the commodity pressurises the prices and vice versa. The prices are governed by the demand-supply scenario rather than any other extraneous factor. At times, the government has stepped in to ban certain agro commodities to rein in prices but it has not been effective.

Bans have become a regular phenomenon for agro commodities. Earlier in the year 2007, in the month of January, the government suspended trades in urad and tur, followed thereon by ban on chana, wheat rice, refined soy oil, potato and rubber to fight rising inflation. A step ahead, the Abhijit Sen Committee was formed by the government to probe whether commodity futures were supporting the price rise at the domestic market. But, the committee was unable to provide significant evidence. The best example can be avowed for urad and tur. Prices of tur at the spot markets zoomed and are quoting at higher levels of Rs 4,500/quintal. The price of tur during the ban were around Rs 2,500/quintal. But, a decline in the production resulted in a rise in the prices. The suspension of the three highly traded commodities like urad, tur and chana had put volumes of agro commodities on the National Commodities Exchanges under immense pressure.

The on and off banning of agro commodities have made investors more reluctant to take positions in agro commodities as uncertainty with regard to the governments policy in this matter is negatively impacting the overall sentiments. The global investor community is also perplexed by this flip-flop policy, particularly with regard to the banning of agro commodities. Lifting the ban on refined soy oil, wheat, potato and rubber on December 4, 2008 created positive sentiments amongst investors and the result was mirrored in the turnover on exchanges. But, then once again, the government restricted trading in sugar in the month of May 2009, which created negative vibes amongst investors.

Issues to be addressed in this budget

Subsidy burden

Pricing anomalies

Disinvestment

Special focus on farm sector

Actions expected by the government

Fiscal prudence

Capacity creation

Promoting investments

Fuelling consumption

Budgets likely impact on the commodity sector

The governments focus on the agricultural economy would be a step in the right direction towards providing a better livelihood for the citizens involved in agriculture. As a majority of the population (around 70%) is still dependent on agriculture for their sustenance, growth in agriculture will be a priority. At the same time, a higher growth rate in agriculture would lead to a higher growth rate in overall GDP.

The governments initiatives towards the banking sectors involvement in agriculture would also require a calibrated approach so that the needs of cheap and timely funding are met. Currently, the farmers are largely dependent on the local moneylenders for their monetary requirements, which is a very serious impediment to the overall growth of the agriculture.

Private-public sector participation is needed for brining in a professional working environment in this sector as this would lead to an all-round growth. For the next green revolution in the farm sector, a professional approach is very much required. At the same time, stress needs to be given to research and development activities related to seeds, yield and better irrigation facilities.

National policy on sales tax across states needs to be formulated to further develop the mandis and local spot markets, as this would lead to a more cohesive integration of regional markets, enabling them to operate under one national market place. This would also lead to a more efficient price discovery mechanism and better utilisation of existing resources.

Likely expectations

Currently, commodity trading is restricted to corporate, physical players and the retail segment. However, we feel that going forward - mutual funds, domestic financial institutions, banks, FIIs and NRIs should also get permission. This step would lead to greater depth and maturity of the markets, boosting the volumes on the commodity exchanges.

Government should have a laid out plan for the commodity futures markets, as the recent ban of sugar and at the same time, relaunch of wheat, sends conflicting signals. It also creates doubt in the minds of market participants, which is detrimental to the growth of the commodity futures markets. A consistent policy is definitely the need of the hour.

Going forward, we feel that the newly formed government would aim at clearing out other barriers to the commodities market. This will help the commodity exchanges to flourish.

FCR Act: With the Congress in action again and with no interference of the Left, we feel that the FCR Act could be passed. This will benefit the Indian commodities market in the following manner 1) It will help to give the FMC an autonomous status, 2) Options could get launched on the Indian commodity bourses and 3) It will enable the entry of professional players like banks and financial institutions in the commodity markets. This act will help to open up the commodity market as it still faces teething troubles. Hence, the formation of the Congress government will help commodities market to take a new step forward as growth prospects will open up.

Warehouse Receipt Act: Warehousing Development and Regulation Bill, 2007 has been passed by the Lok Sabha on May 15, 2007 and by Rajya Sabha on May 22, 2007 respectively. The bill has been sent for the presidential approval for enactment. The enactment of the bill would improve the supply chains and encourage scientific warehousing of goods. The enactment of the bill would have the following benefits.

1. As it is mandatory for every warehouse to get registered, only those warehouses which satisfy the storage specification and standards can issue negotiable warehouse receipts with the Authority. Thus, only those warehouses with larger capacities meeting the standards will be at better position than those with smaller capacities and lower standards.

2. According to the bill, the warehouse would be accredited which will enhance the business of warehousing. This would help in providing easy funding from the financial institutions without any collateral manager.

3. The bill eradicates the practice of double financing by the owner of the warehouse, which was prevalent before, i.e. owners of the warehouses earlier took multiple finance from the banks. Every owner through this latest bill is provided a Performance Guarantee Fund. If, he issues duplicate certificates then his registration would be cancelled. Thus, manipulations would be reduced.

4. Bills would be transferable and can be endorsed.

An opportunity knocking

We expect that in the coming years, the volumes on the commodity bourses to cross Rs 50,000 crore on a daily basis. The present is just a tip of an iceberg and as the Indian economy occupies its rightful place in world economy, our commodity markets would be among the largest and most vibrant. The overall growth of the national spot markets and our seamless integration with the commodity exchanges is very essential for price discovery and growth of the markets, so that benefits of price discovery and price risk management reach the hedgers/producers/consumers of the commodities. The governments proactive steps are the key for all this to happen.

The author is associate director (commodities and currency) Angel Commodities