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Commodity Futures in India

The turnover of the commodity futures market has grown exponentially in a short span of time. With a skewed market participation that largely favours speculators, the futures market leaves a lot to be desired as an effective instrument of risk management and price discovery for the benefit of the growers, traders, processors, and other stakeholders in the physical trade. Policymakers have overlooked wider considerations involving the discipline of checks and balances. Owing to the massive size and non-zero-sum game character of these markets, they are likely to introduce a series of unsettling macroeconomic effects, such as a possible redistribution of incomes from the small players to the big speculative financial market entities. The article concludes with a reference to the factors that could have been behind the snags afflicting the present commodities futures policy, and suggests how the needs of the real economy can be satisfied by strengthening the forward trade that is firmly anchored in the physical trade of the farm commodities under reference.

Commodity Futures in India

Away in 2003, the nature of commodity trade in India has undergone a sea change. Going by trade volume and

Economic and Political WeeklyMarch 31, 20071164futurestrade, confined as it was to just six commodities in21small exchanges, regulated under the amended ForwardContractsAct.Following the far-reaching changes in the country’s policyregime in the 1990s, the issue of futures trade liberalisation toocame to the fore, and in 1993, the issue was referred to acommittee.4The committee recommended by a majority view topermit futures only in a 17 commodities and unanimously opinedagainst granting permission for futures in wheat, pulses, non-basmati rice, tea, coffee, dry chillies, maize, vanaspati and sugar,on the basis of a case-by-case review of the suitability of eachcommodity in the light of its present and likely position in thecoming years [GoI, Ministry of Civil Supplies 1994, pp 33-63].But the committee suggested substantial liberalisation of forwardtrading linked to physical trade and actual deliveries for meetingthe bona fide needs of those connected with production, tradeand processing of various commodities (ibid, p 83). As we seelater, this is the kind of liberalisation that can really serve genuinehedging interests and can avoid the excesses of the kind observedrecently following the revived futures. However, when the secondphase of liberalisation was taken up in 2003, the NationalDemocratic Alliance government issued a notification permittingfutures trade in 103 commodities [Lingareddy 2006, p 212]. Thisextension of the futures trade was carried out without simulta-neously setting up a strong, revamped regulatory agency and anappropriate enabling law to support such an agency. It may benoted that presently a Bill is pending before Parliament to strengthenthe Forward Markets Commission and permit options trading(apre-eminently suitable instrument for speculative contracts)and a loan of $ 100 million from the Asian Development Bankhasbeen contracted for supporting enlarged and regulatedfuturestrade.IIINature and Form of Futures TradeShortly after the above-mentioned notification, as many as 24commodity exchanges, three national and 21 regional, wererecognised. These exchanges started offering contracts of varyingsizes, including in essential foodgrains, edible oil seeds (includ-ing many imported oilseeds), gold, silver, other metals, crudeoil, sugar and some spices. While the national exchanges aremulti-commodity exchanges, the regional ones are offering singlecommodity contracts (though attempts are afoot now to convertsome of these into multi-commodity exchanges). Except for 3per cent of the futures trade handled by the regional exchanges,by December 2006, the rest of the turnover has been concentratedin the three national exchanges [GoI, Ministry of Finance 2007,p 81]. Until last year the share of these exchanges was 93 percent of the total, underscoring the marginality of the regionalexchanges [GoI, Ministry of Consumer Affairs 2006, pp 73-75].Available information shows relatively small participation ofaround 15 per cent of the turnover in some exchanges by thehedgers [Pitalwalla 2006, pp 43-44]. Modern trading practiceslike on-line trading, standardised contracts, warehouse support,up to date clearing arrangements and wide dissemination of dailyprice changes have replaced the antiquated open-cry method onthe floor of the exchanges. One major national exchange operates10,000 terminals in 450 towns all over the country, comparedto 650 members in 460 towns that the National Stock Exchangehas. Another commodity exchange has 800 members in 400 cities(ibid). These facts indicate the relatively greater and growingpopularity of commodity futures. Thanks to the all-India networkof terminals, it has become so easy for the small ‘mandi’ tradersand other players across the country to buy and sell commodityfutures by ‘investing’ a small amount of margin money. The smalltraders along with big ticket financial market players, brokers,day traders, some large hedgers, who may or may not keep thecontracts outstanding until the time of the settlement, are themajor deal-makers. It is difficult to estimate the number ofparticipants and the total amount of financial resources used forpurposes of futures trading. A very high degree of leveragingis possible on these markets. One comes across estimates of thefinancial resources used for futures ranging between Rs 5,000crore5to Rs 1,00,000 crore, though it is difficult to have a moreprecise estimate, especially in view of rather perfunctory super-vision of these markets in which the Know Your Customer (KYC)rule is yet to be enforced.Owing to the factors mentioned earlier, farmers remain, by andlarge, outside the arena of futures trade. The organisation, struc-ture and modus operandi of the futures exchanges militate againstthe participation of farmers, since they are located in the metrosand conduct their computerised trade in English. In any casethemarginal, small and medium farmers, with small and oftennon-viable operational holdings, are often net buyers of foodanddevices like warehouse receipts maynotenablethemtoparticipate in the futures.6 The complexity of the futures andthe large size contracts (for instance, 10 tonnes contracts forall farm goods, except spices, which have three tonnescontracts) also tend to rule out the participation of theoverwhelming majority of resource-poor cultivators. Partici-pation by the cultivators through their cooperative marketingapex organisations too has not been explored so far to testthe viability of this option. This, however, is based on theassumption that the farmers need an instrument like thefutures, which cannot be taken to be self-evident. The kindof factors that increase the clout of the big and institutionalplayers, as well as brokers (who operate both on their ownas also on behalf of their clients, and have fairly large andregular access to bank finance) would largely hold good forthe arbitrageurs as well. These players operate simultaneouslyin a number of inter-related market centres in order to takeadvantageofthegap between the spot and futures prices.Similarly, players who operate in a number of financial markets(and some of them may well be having an interest in physicalgoods as well owing to the recent permission to the big companiesto buy directly from the farmers by the amendment of the statelevel agricultural marketing acts by as many as 18 states, underpressure from the centre as a part of its agenda to extend theeconomic “reforms” to the farm sector as well), and havealongtradition of being in the futures and other financial markets,have an inherent upper hand vis-a-vis thousands of smallparticipants lured in by on-line trading. In brief, the emergingfutures markets are characterised by multifaceted asymmetriesbased on uneven economic position and knowledge. Many smallplayers are unlikely to find the resources to enter into contractsfor precious metals and wouldin all probability be ill at easedealing in crude oil and metalsfutures.Heavy concentration of futures market turnover in two nationalexchanges and in some commodities, high degree of pricevolatility,unpredictable and abnormal relationship between theready and futures prices, great disproportion between the
Economic and Political WeeklyMarch 31, 20071165actualphysical availability of certain commodities in a givenyear and the magnitude of futures transactions. The latter wasfound to have exceeded the former by 10 and 12 times foruradand gram respectively, and by over 230 times for guar inrecent times [Kabra 2006, p 55], giving rise to suspicions ofcircular trading in these commodities. These trends also showthe insignificance of stakeholders in the physical trade andpointtowards the possibility of manipulation by means oftacticssuchas squeeze andcornering (though one cannot bedogmatic on this possibilityowing to inherent difficulties ofdetecting them). The timing, level and volatility of price changesaround the time of closing and around the beginning of newcontracts also point to the absence of reckonable countervailingparticipation bygrowers,processors and consumers, and theinherent weaknessofthe regulatory processes (to be discussedbelow). That there is a very smallproportion of actual physicaldeliveries may betreated as a clinching indicator of the overlyspeculative character of these markets as they have come tooperate in India.A combination of these factors, both by way of omission andcommission, made for the huge popularity of the futures market.This is reflected in the phenomenal growth of turnover of futurescontracts in a short period of three years (see the table). Duringthe current fiscal, between April and December, the total turnoverwas of the order of about Rs 28 lakh crore, which amounts toa daily average turnover of over Rs 12,000 crore; by December,thenumber of contracts of the three major exchanges were around525 lakh [GoI, Ministry of Finance 2007, p 81]. The hyper growthof futures trading has reached such a high pitch that in October2006, daily average trade in chana in just one exchange atRs399.46 crore, which outdid the daily turnover of a blue chipshare like Reliance (Rs 131 crore) (Amar Ujala, October 27,2006). The GDP of India at current prices for 2006-07 is estimatedat around Rs 41 lakh crore, and the volume of futures tradethisyear up to December has already touched around 90 per centon an annual estimation basis. The volume of the future tradehas already surpassed the turnover of the 150-year old stockexchanges. Not only this, even the size of the actual physicaltrade, ie, ready markets trade, in all the commodities takentogether contributes around 13 per cent of the GDP (Tenth Five-Year Plan, quoting the NAS, VolII, p 905, Hindi version), whichseems to have been dwarfed by the turnover of the commodityexchanges. Insofar as far as some agricultural commodities withfutures contracts are concerned, the share in futures is practicallyin inverse proportion to the weight of these commodities in thenational income. Jeera, guar, chana, soya oil and seed, menthaoil, masur, Burmese urad and wheat have attracted futures contractsrunning up to five digit figures, exceeding the figures for thosecommodities in which we have had a continuous tradition offutures trading (such as castor seeds, pepper, turmeric, jute,cotton). It can be inferred, thus, that the sidelining of the realmerchandising sector vis-à-vis the largely speculative futurestrade is an inherent feature with significant implications for themacroeconomic fundamentals of the economy. It has beenmaintained that “As a lot of fund money is chasing commodities,prices have disconnected themselves from fundamentals”(EconomicTimes, December 15, 2006 quoting the commodityhead of a large financial institution). Given the above, it is difficultto visualise the effect of real fundamentals on the decisions ofthe participants, whose interest in and familiarity with the com-modities traded remains non-established. The factors mentionedabove cast a doubt on the tenability of the proposition that “Alarge number of different market players participate in buyingand selling activities in the market-based on diverse domesticand global information, such as prices, demand and supply,climatic conditions and other market-related information. Allthese factors put together result in efficient price discovery asa result of large number of buyers and sellers transacting in thefutures market” [GoI, Ministry of Finance 2007, p 82, emphasisin the original]. Quite simply, the large number of marketparticipants seems to be too thin a basis for drawing such aninference, since much depends on the basic interest thattheparticipants have in the traded commodity, currently and/or as a matter of established practice. These are large empiricalquestions and so far, as far as one knows, no one seems tohaveinvestigated these issues at the field level. There is nostipulation in the Indian commodity exchanges for the par-ticipants to establish their bona fides as actual merchandisinginterests.It may be noted that tur and urad pulses were taken out of thepurview of the futures in January and wheat and rice were madeto follow suit at the end of February. The curbs are supposedto be temporary and the issue of the futures in farm goods hasbeen refereed to an expert committee. A bill is pending in theLok Sabha to permit options and derivatives and the participationof gigantic financial entities from abroad into the over-corpulentfutures markets in India.7IVQuestionable ClaimsWhat are the effects of the hyper growth and “financialisation”of the commodities trade (also its “corporatisation”), the resultingwild fluctuations in futures and the upward pressure on spotprices? Do these price signals say anything meaningful aboutthe emerging fundamentals to guide the real economy, especiallythat of the growers? Over any given trading day, the futures pricesmove in a wide range, and over time, the same trait continuesin an accentuated manner. Generally spot prices follow the leadof the futures prices, though the spread between the two, doesnot show any particular trend. With limited, if any participationby the growers, and marginal presence of the hedgers (exceptsome large entities), these prices are viewed as the handiworkof too much money playing around with relatively small quan-tities of the commodities referred to in nominal terms. Even intheory, the informational efficiency or adequacy of these pricesare suspect. It has been stated that “The ability of a futuresexchange to function properly depends in part upon the abilityof the exchange and the regulator to ensure that the prices ofthe contracts traded on the exchange reflect supply and demand”(a World Bank assisted study titled ‘Report on the CommodityTable: Turnover on Commodity Futures MarketYearTurnoverRs CrorePer Cent of GDP2003-04129,3644.62004-05571,75918.32005-062,155,12261.02006-07 (April-December)2,739,34090.0*Notes:These data relate to total notional turnover and not to open interest.* Based on full-year estimation.Source:GoI, Ministry of Finance (2007), Economic Survey, 2006-07.
Economic and Political WeeklyMarch 31, 20071166Exchanges in India’). The observed features of the futures marketin terms of its huge volume, many-sided concentration and theabsence of real trading interests, especially regarding agricul-tural goods are enough to suggest that the price discovery wouldbepoor in terms of what financial analysts call “strong-formefficiency”,reflecting instantly and fully both public and privateinformation [Pilbeam 2005, p 249] .Thus, the kind of conditionsand practices of the futures markets we have mentioned in theforegoing suggest that futures prices would hardly be able tohave even an arms’ length relationship with the present andfuture production and demand conditions. Obviously the pricediscovery role of the futures market has been exaggerated,especially by implicitly attributing to these prices the propertiesof social or shadow/accounting prices, reflecting macroeco-nomic current and future conditions. In fact, even the extent towhich these (farm goods) prices become known to most of thefarmers is far from clear. Non-substantiated assumptions seemto have been made regarding the informational efficiency ofthese prices, which result from the interplay largely amongfinancial-speculative interests (as there is no mechanism toensure that at least one party to the contract has real, substantiveinterest in the physical commodity or that at least the closureof the deal would involve physical delivery). Even the theoryof futures trade recognises the prevalence of contracts betweenspeculators themselves for “assuming speculative positions”[Pilbeam 2005, p335] and in around 99 per cent cases thereis no physical delivery since traders enter in to reverse tradesand where there is a regulatory compulsion for physicaldelivery, they can walk out of it by making payment of apenalty (ibid, p336). Thus there seems to be little reason anda thin basis for relating the decisions of the futures operatorstothe real market factors and trends with respect to thegoodsofagricultural origin. It is clear that public policy onthefutures market took the price discovery function to beaxiomatic.Coming to the price risk management (PRM) function, let usfirst see what in fact is the nature and extent of the price risksfaced by the growers of farm goods in India. Insofar as farmgoods in India have been given increasing minimum support price(MSP) every year and the general long term trend in the marketsand MSP have been of an upward movement, can one argue thatthere is any palpable price risk that has to be managed?8True,everything is not hunky dory regarding agricultural marketingin rural India. There are lingering post-harvest problems con-cerning adequate storage, movement to the market or mandi townor the distress caused by pressing immediate need for cash orthe inadequacies of the government’s procurement arrangements.These are not the kind of issues for which the futures can providean answer. Of course, there are seasonal dips, but that is not anunknown or unpredictable feature of the farm goods market, atleast directionally. While such seasonal price troughs tend tocause an adverse change from the growers point of view, themore powerful market entity, namely, the traders, generallybenefit from the busy season dip and lean season increase inprices. Thus the PRM process by means of these contracts is calledupon to meet two opposite needs, and the actual outcome mayperhaps satisfy none, since it is determined by the overactive andresourceful speculative forces, the major players, with their owncalculus and predilections. It is difficult, therefore, even on apriori grounds, to see how the futures can reconcile the needsof largely non-participating growers and marginally presenthedgers from among the traders processors. Here one need notgo into the availability of other instruments that can be used forthe purpose with greater effectiveness. Enough literature existson the methods of improving the marketing of farm goods.Theobserved functioning of the futures market with extensivevolatility and its domino effect on the spot markets have contrarilybecome another unwittingly courted source of unsettlinginfluenceson the farm goods market. It may be noted that wehave seen little evidence of adverse effects of the futures in gold,silver and internationally exchange-traded goods like crude oiland metals.While failing to discharge its assumed role, as seen above, hypergrowth of the futures has produced many other adverse economicand social effects on the economy. In the absence of any sys-tematic empirical investigation of the issue, we may have to goby some press reports about certain effects of the futures. Thesereports show that some organisations of traders, who hardly everdemanded the futures in the first place, are now actively opposingthe futures, since many have burnt their fingers participating inthem. They have complained of massive losses they were forcedto book (Jansatta, May 28, 2006). Similarly, egg producers havefelt the pinch of abnormally high maize prices manipulated bythe futures trade (The Hindu, December 22, 2006). The StandingCommittee on Food [Lok Sabha Secretariat 2006] of the LokSabha has also opposed the continuation of futures in farm goods.The currently observed excessive increases in the prices of wheat,pulses, edible oils, spices, etc, have been attributed to speculativeexplosion in the futures [Kabra 2006]. There have been reportsthat volatile price behaviour of the futures in mentha oil hasharmed actual merchandising interests and exports, leading tolosses, as well as weakening our reliability in the export markets(Open Letters to the Forward Markets Commission by TV 18commodities The Kabra Committee raised ques-tions about the opportunity cost of the deployment of our financialsavings in the futures markets, especially the “diversion of money/finance to sustain a bullish run on prices and entail a heavyopportunity cost in terms of real industrial investments foregone”[GoI, Ministry of Civil Supplies 1994, p 12]. Its opportunity costin terms of foregone real sector investment and employment canwell be imagined.VPreconditions for Checks and BalancesThe preceding discussion about performance of the futuresmarket during 2003-06 suggests questioning of the theory of thefutures markets as it is popularly expounded and extolled. Itappears that the theory is based on certain clearly spelled outassumptions about the nature of the commodities fit for futurescontracts, the nature of the markets in which the contracts aretraded, the role of participation in providing depth andliquidity,balanced participation by contending forces, the roleand mode of functioning of the commodity exchanges, and asystem of self-regulation supervised and supported by anempoweredpublic regulatory body. If these assumptions aregranted, the theory seems, a priori, quite sound and un-exceptionable[UNCTAD 1993; Sparks Company 1993; Pilbeam2005]. What the theory does not indicate is that simply byinstituting commodity futures in each and every commoditymarket, one can hope to be assured of the expected outcomes.The whole process and its results “are in the realm of
Economic and Political WeeklyMarch 31, 20071167possibilitiesand their actual realisation is contingent upon thefulfilment of a set of conditions” [GoI, Ministry of Civil Supplies1994, p 9] specified in the theory itself. The literature on thesubject specifies a number of conditions for effective use of thefutures market for any commodity, ie, without any explicitdifferentiation between commodities of different kinds. First, thecommodities traded must be homogeneous, fungible, interchange-able, storable with a long enough shelf life, with “terminal marketfacilities and infrastructure that are strategically placed andadequate for the delivery functions of the futures contracts”[Sparks Company 1993]. Second, they must be free of govern-ment control and regulation. Third, the number of independentbuyers and sellers, free to enter and exit both physical and futurestrade must be large enough to prevent, on both the sides of themarket, the emergence of oligopolistic structures. Fourth, effec-tive supervision and control of the exchanges is essential to obtainsound and fair outcomes. Fifth, free flow of information to allmarket participants is essential, for the prices in the futures tofully reflect available information. Sixth, both physical andspeculative interests must be present in the market in largenumbers in order to ensure that no single group or firm or a cartelof some allied firms dominate the market and decisivelyinfluenceits course [GoI, Ministry of Civil Supplies 1994, pp9-10; UNCTAD 1993; pp 4-7; Sparks Company 1993]. Theaccount given above, and the commodity-wise analysis given invarious reports are enough to indicate that these stringent con-ditions do not apply to most of the commodities, and certainlynot to the markets for farm products. In fact, the conditions forthe effective discharge of the avowed functions of the futuresare, by and large, uniform for all kinds of goods and no specialconditions have been suggested in theory for the ensuring thesuitability of the futures for the goods of farm origin. For reasonsof space we cannot go further into this issue. Suffice it to saythat various committees appointed by the government from timeto time have done a detailed examination of various farm goodson a case by case basis and have rarely found these goods suitablefor permitting the futures.The basic point is: the dominance of the speculator-financialinterests in the futures gets accentuated by structural and insti-tutional weaknesses and barriers preventing participation by thecultivators. This factor was highlighted in the Khusro CommitteeReport [GoI, Ministry of Civil Supplies 1980]. It argued, “veryfew cultivators actually derive such benefits by direct use of afutures market for the following reasons. Very few producersraise crops which are large enough to compel them to think interms of hedging. Generally, the producers sell the bulk of theirproduce immediately after harvesting and do not carry any sizeablestocks. Most of the producers are illiterate and unfamiliar withthe complicated technique of hedging” (p 11). Even in Saurashtra,where there has been a long tradition of futures, it is the largefarmers who make direct use of futures for hedging purposes.With growing concentration of land and growing non-viabilityof most farms, it is difficult to visualise how can the participationof the growers wider in the present context. It is inherent in thecharacter of the futures markets that “like other financial instru-ments futures and forward markets can be used for both managingrisks and assuming speculative positions” [Pilbeam 2005, p 335],and there is nothing to prevent the speculators trading amongthemselves without the presence of real merchandising interests.9It would be facile to suppose that even without their participation,the outcomes of the futures market can be beneficial for thefarmers or small traders who stock and supply the cereals to theconsumers all round the year. Moreover, given the growing sizeand dominance of the financial sector in market economies allover the world [Magdoff 2006; Foster 2006], it is not unlikelythat the futures will remain largely a domain of speculators, acategory without whose presence the futures market cannotoperate; even higher margin requirements may not prove enoughto deter speculative deals. It is true that in some countries, suchas the US, the regulators specify lower margin requirements forthe actual physical interests than those prescribed for the specu-lators in order to facilitate the participation of the former. Butin India neither there has been any such stipulation, nor doesit seem likely that it can be enforced with success as the ex-perience with detailed controls and regulation in the pre-1991era has shown. The huge size of the black economy finances,and the ease with which it can play in the futures markets (sincethere are almost no attempts to prevent tainted moneys fromentering the futures) are fuelling further the growth of thefuturestrade.The relevance of futures trade in an already inflationary economy(except as a means to unwittingly intensify inflationary pres-sures), has also been questioned by the Khusro Committee.10The need for PRM arises when the price movements are unpre-dictable or are divergent and adverse and not as a result of allkinds of price changes. Thus it can be said that the results thatthe theory of futures market predict cannot become operationalin India, since the preconditions for delivery of the hypothesisedideal outcomes simply do not exist for the products from the farmsector. The market for wheat, rice, coarse cereals, pulses andedible oils are segmented. To an extent, wheat and rice may bean exception. But these two major cereals fail to meet the otherconditions, especially the one relating to absence of publicintervention. So long as food security in India remains precarious,owing to low per capita availability, fluctuating levels of pro-duction and internationally low comparative yield levels, lowoverall per capita consumption, etc, and the need for meetingthe challenge of hunger and malnutrition continues to concernpublic policy, the state has to remain an active player in theregulation and control of production, pricing, distribution andstorage of these major cereals. Thus both for reasons of nationalfood security as also for ensuring food security at the householdlevel, the food economy is not and is unlikely (in the foreseeablefuture) to be free of public regulation and controls. The com-patibility of futures with the objective of ensuring foodsecurityatthe micro-level is open to serious questioning. Alsothe need to maintain buffer stocks for national food securitywould continually demand public policy interventions inthefoodmarket and render these commodities non-suitableforfutures.VIBasic Flaw in Regulatory MechanismGiven the theoretical non-tenability and actual history ofineffectiveness of self-regulating markets as shown powerfullyby Karl Polanyi (1975, pp 68-76), the spontaneous emergenceof forward markets and of commodity exchanges to tide overthe difficulties arising from counter-party risks in over-the-counter trade was supplemented by legal arrangements bysuccessive governments. As argued earlier, in India, the task ofsuccessful regulation is highly unlikely to be effective, since
Economic and Political WeeklyMarch 31, 20071168the basic conditions for effective futures for most farm goodsdo not exist. The effectiveness of forward markets is a contingentoutcome and not a necessary one consequent upon the initiationof such markets, as seen above. This factor underscores the roleof public policy choices concerning products for which futuresare permitted and the regulatory conditions for keeping thecontracts on track. It is also well understood that the moreinfluential and bigger the players in the futures market (suchas big brokers, financial funds, etc), the greater are the chancesthat they are a part of the management of the exchanges. Thesefeatures of the exchanges tend to cloud the objectivity andfirmness with which self-regulation can be effective. In any case,there is no mechanism to ensure that ready markets are notswayed under the domino effect of the much larger and morefrequently and extensively reported price movements of thefutures markets. However, there is no guarantee that thetwosetsofprices always and necessarily move in the samedirection.Moreover, the distance between the two prices isalsoquite variable. Similarly, the socio-economic objectives tobe served by preventing unhealthy futures market effectssimplydo not form a part of the motivation and agenda oftheexchanges, whose basic interest lies in increasing theirturnover.Can a state-instituted, empowered agency such as the ForwardMarkets Commission (FMC) ensure that the markets remain trueto their theoretically enjoined task? In any case if the commoditiestraded in the exchanges do not satisfy the conditions essentialfor successful futures trade, the scope for the regulator toensuresuch ideal outcomes does not exist. Had such possibilitiesexisted, one would not have seen what has happened in the futuresmarkets for mentha oil, guar gum, Burmese urad, wheat, etc,during 2005-06 and the current year, forcing the authorities toimpose a ban on futures in some commodities. For speculators,commodities are no more than pegs to hang their deals on, butthe spot markets have no reasons and basis for not reacting tothe futures prices, unless manipulated. The point is not that spotprices are insensitive to futures prices or can be insulated fromtheir influence. The point seems to be that there is little possibilityof the futures market setting prices that can serve the needs ofPRM and price discovery relevant for actual physical traders andgrowers. Nor are there any instruments of regulation that caninfluence the futures market to yield such prices (equivalent tothe shadow or accounting prices) as are consistent with theobjectives of public policy or the needs of the real economy. Thismakes the task of regulation difficult, and the few measures thatare taken are usually too little, too late, and some of them arelargely non-enforceable.11It may be recalled that it was recommended that prior to theextensive revival of liberalised forward markets and permissionfor futures market in a number of commodities, the old law mustfirst be amended in order to equip the regulator with sufficientpowers and clearly specify of the lines along which regulationhas to be carried out, since the sequence of policy changes arematerial to their success [GoI, Ministry of Civil Supplies 1994,p 79]. However, the law was not amended and the new Billintroduced in 2006 seems more inclined to open the floodgates,both by way of new and far more speculation-prone instruments(such as options and derivatives and large financialmarketplayersfrom across the world) than in strengthening theregulatory functions by going in for greater autonomy of the FMC[Lok Sabha Secretariat 2007].VIIAlternative of Liberalised Forward ContractsWhile the present policy regarding commodity futures hasbecome highly controversial, there are no systematic studies ofthe outcomes generated by these hyper active markets. Manypopular writings and protests by sectoral interests and politicalparties have attributed a part of the responsibility of the sharpincrease in the prices of many agricultural goods to speculativeexcesses visible in the enormous turnover of the futures market,with a good part of it concentrated in farm goods. As the gov-ernment has suspended futures contracts in some farm goods,it can be taken to be at least a grudging acknowledgement ofthis tendency. However, at the official level, the massive turnoverof these markets has been mentioned prominently as a positivedevelopment, as though an achievement by itself, in officialpublications like the Economic Survey. In fact, the EconomicSurvey devotes nearly half of a chapter to the commodity (futures)markets, suggesting the possibility at an a priori level of thetheoretically posited benefits, subject to installation of a properregulatory system. No real field level gains have been attributedto this policy of liberalised commodity futures.12The high volatilityof the futures has also cast its shadow on spot prices. The sluggishgrowth of the farm sector has been with us for quite some timebut without such a sharp increase in prices, especially in theconsumer retail markets.Our analysis of the working of the futures market suggests thatthe policy decision to adopt en block futures trading failed totake into account the needs, limited market capabilities (in termsof command over resources, skills and knowledge, access tofinance) of those very sections for whose benefit statedly thefutures were permitted. It seems possible to surmise that theintroduction of the futures in commodities such as gold, silver,crude oil, etc, does not seem to have upset the ready marketsand possibly have attracted hedgers as well in reasonably goodnumbers. But even a quick reflection would probably suffice toindicate that unlike the case of bullion, for the farm sectorcommodities the real economy interests are in a far too weaka position compared to the financial sector operators. As we haveseen, there is little reason to expect the futures to serve pricediscovery and PRM functions for farm sector goods. The so-called price discovery function has little relevance for farmersin their present conditions. The decision to open up farm com-modities to futures trade ignored the expert advice-based on anexamination of the suitability of different commodities for exposureto futures markets. The decision-makers did not seem to haverealised that the infrastructure for involving farmers located inrural areas in the futures trade did not exist. The fact that theiron grip of moneylenders pre-empts the sale of a good part ofthe farm output coming to the market (the well known pheno-menon of interlinked commodity, credit and labour markets,along with their segmentation) almost rule out the possibility ofthe use of hedge markets by the farmers, except probably by bigfarmers and plantation interests, that is, if one were to abstractfrom the question of an even playing field vis-à-vis the specu-lators. For instance, a simple device like a warehouse receipt forenabling one to hedge in a distant metropolitan futures exchangeis a rather elusive entity in the Indian farm sector. If a contracthas to be concluded by physical delivery, one can well imaginethe difficulty and heavy transactions cost it would involve. Thusin addition to the non-fulfillment of the technical conditions for

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