Amid all the tittle-tattle over India?s emergence as a global economic power and a key commodity player, the latest data on the turnover of its commodity exchanges quietly point to a disturbing trend. Futures trading is advancing at a much faster pace in commodities that are barely produced in the country and pathetically lagging in items of which it is a key producer. India hardly produces gold, silver and crude oil, but 76% of its futures trade value came from bullion and energy so far this fiscal.
On the contrary, it?s the world?s second-largest producer of rice, wheat, sugar, cotton and tea and the largest producer of pulses and jute, but farm items accounted for barely 10% of its trade value during the period, thanks to frequent bans on some agricultural commodities since 2007 and uncertain policy environment. The total turnover of commodity exchanges, too, lags its potential.
The immediate result is while futures prices?which act as a reference point for spot rates as well as many import deals ? are set in New York, Chicago or London, India merely follows the trend despite being a key producer, consumer, buyer as well as supplier of many commodities. This means Indian buyers are often compelled to shell out more for prices that are artificially high and don?t reflect the actual demand or supply within the country. For an economy that is heavily dependent on commodity imports to fuel growth, the ?price-follower? tag collides with its global ambitions.
A comparison with China seems unavoidable here. The futures trading value in China rose more than 136% to $46.88 trillion in 2010, state-run China Daily reported citing the China Futures Association data. In contrast, India?s futures trade value rose to $2.3 trillion in the fiscal year through March 2011, which means we just trade roughly 5% of what China does annually. China accounted for more than a half of global commodity futures volume in 2010.
The silver lining for India is that China, too, hasn?t been able to cash in on its huge demand and supply appetite and just follows the price trends, mainly due to a lack of global trust in the regulatory systems at its exchanges and in the security of pricing contracts in a freely convertible currency. But that is set to change if the recent behaviour of Chinese authorities is any indication.
In May, the Hong Kong Mercantile Exchange (HKMEx), which comprises shareholders including two state-run Chinese corporations, opened for business. It has the advantage of Hong Kong?s fairly transparent regulatory environment and also offers China an exchange to challenge established players such as NYMEX, CBOT and the LME.
It?s everybody?s guess that to assume a global role in commodities, India has to set its own house in order and that it has to first evolve a long-term policy and desist from crushing the futures market.
Consider this: India allowed futures trading in 2003. And even before it allowed some time for the nascent platform to grow, it banned the trading of wheat, rice, tur and urad in 2007 and followed it with restrictions on soyaoil, rubber, chickpea, potato and sugar, mainly due to the insistence of the left parties.
Even after the panel, set up by the government with Planning Commission member Abhijit Sen as its chairman, concluded that there was no evidence to suggest futures trading led to the price rise, the government was slow in lifting the restrictions.
A bill to give more autonomy to commodity markets regulator, Forward Markets Commission, and allow trading in options and indices has hung fire for more than five years now. In September 2010, the Cabinet approved proposed amendments to the Forward Contract (Regulation) Act, 1952, but the bill hasn?t been introduced in Parliament yet.
The delay is partly driven by the fear that if the FMC, which had informally opposed ban on futures trading of some commodities on various occasions but had to toe the government line, is given more teeth, any move to restrict such trade in future to tame soaring prices may pit the government against the regulator.
Ironically, while many countries aim to stop speculative elements in futures trading through efficiency and regulations, India stops trading itself. But the moot point is, as a former head of the regulator said once off the record: ?You don?t shoot through your eye to kill an insect in it. Futures trading is like globalisation, you can argue in favour of it or against it, but you can?t stop it, and when you adopt it becomes the focal point of your global ambitions.?