Logically, any commodity that can be traded should be allowed on the futures platform as it gives a chance to users to hedge their risk. In fact, if the rules of the game are played out well, it should lead to efficient price-discovery, which is what a futures market is all about.
Two sets of products are being pushed, of late, for inclusion in the futures-trading basket. One is from the energy sector and comprises petrol and diesel while the other is in agriculture and includes tur and urad. The latter did have a fairly efficient history of trading before a ban was imposed while, for the former, there is a compelling case for introducing the same. With prices moving up and the government not willing to relent on duties or subsidies on fuel, the inflation cost of fuel price today is high. The reservations against their inclusion are more on the sensitivity issue, where any constituency can make political capital by linking futures trading to higher prices and call for a ban on such trading at a future date. And, in an election year, even the most progressive government will prefer to ban futures trading rather than lose votes due to negative propaganda. Therefore, there will most probably be little support for futures trading in such products, though the arguments are compelling.
Let us look at petrol and diesel. The prices are based on the Indian basket of crude, which is a mix of various crude prices and is fixed—in the sense that these prices are determined overseas. Then, there is an exchange rate that is used to convert the same to a rupee price. To this, the processing charges are added as are the various sets of taxes that are outside the GST. The price is hence a sum of all these components that are all liable to change depending on how things move. When anyone takes a call on the futures price of petrol, one is talking of betting on crude oil price (that already exists in a contract on Indian exchanges), the exchange rate (that also has derivatives being traded on Indian platforms) and taxes that are fixed by the government. If two components are tradeable, then, logically, trading the sum—including the institutionally fixed tax rates—makes sense. Therefore, not allowing such trading cannot have a founded basis.
Can anyone rig the market? The answer is no. All contracts are currently settled on the price of IOCL, HPCL and BPCL that arrive at this in consortium; hence, there is no scope for rigging the spot price. The futures price will be efficient and clean. There is no chance of prices being pushed up when PSUs already decide the final price based on their formula. Given that PSUs are owned by the government, there is no reason to suspect the price and futures trading will actually give a lot of depth to the market. Even if one wants to push up or down the price, it will result in a bad solution as the final settlement price is being decided by the OMCs. Therefore, prices will necessarily be orderly. The same holds for diesel and, hence, these contracts should be on the table. There can be a case of these products not working out as large buyers of such products may be limited, but this can be a call to be taken by the exchange. There can be no national harm.
Let us now look at pulses. In the last three years, we have struggled to support farmers growing tur and urad. First, the crop failed and prices shot up making inflation a major problem. Subsequently, thanks to the cobweb syndrome where farmers decide on their crop based on prices in the previous year, there was over-sowing of tur and urad that led to higher crop production and fall in prices. Farmers lost out due to low prices and the rural demand story came apart. Also, there has been farm-distress and the government believes increasing MSP is the solution. But, will that work? There are reports that Maharashtra has made buying below the MSP a crime. This may sound really odd. But then, it is a desperate way to ensure farmers get a higher price. However, what if it leads to inflation and RBI has to increase rates further?
The solution is to have futures trading in these commodities so that the right price is discovered. We need to get out of the mindset of having the farmer getting the highest price or the consumer paying the lowest price—else, we will only be messing up our markets. Now, looking back at why urad and tur were banned, low production led to prices flaring. It was suspected that the spot price was rigged to ensure that settlement took place at the wrong price. The solution was to ban the product.
This was over a decade back, and the market has moved considerably forward since then. We are happy today at the e-NAM taking off. Why then can’t we use the e-NAM price as the spot price for settlement where transactions really take place and the market is monitored by the government? The futures platform will get the right price for all farmers and the government need not unnecessarily try now to get everyone to buy at MSP. Farmers can keep swapping choice of crops and sell forward the output in advance, based on futures prices. This is a very good market-led solution.
While political noises can get toxic for any government, the logical corollary to having an eNAM is to also integrate all such marketing with futures trading to get a robust agri market. Futures trading in commodities is required to make the system complete. Otherwise it will be a halfhearted attempt as most of our initiatives tend to get diluted along the way. This should not be allowed to happen.