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Independence Special
Posted by Inditrade on Aug 14, 2017

Commodity Markets down the Years

With its long and illustrious history of trade in cotton, indigo and spices, ancient India always had some informal form of trading in commodity derivatives. Organized commodity trading in India, however, started only in the 19thcentury, with the constitution of the Bombay Cotton Trade Association in 1875. Following this, Gujarati Vyapari Mandali was set up in 1900 to carryout futures trading in groundnut, castor seed and cotton and later, in 1919, forward trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd. And then there was no looking back…

 

Indian Independence ushered in Standardization and Regulation

Soon after India gained Independence, the Parliament passed the Forward Contracts (Regulation) Act, 1952. With this Act, forward contracts in commodities all over Indiawere synchronized. Further, only those associations/exchanges, which were recognized by the Government were allowed to organize forward trading in regulated commodities. A three-tier regulation was instituted, wherein the exchange, which organizes forward trading in commodities, regulated trading on a day-to-day basis. At another level, the Forward Markets Commission was responsible for regulatory oversight andfinally, the Central Government remained the overall regulatory authority.

 

Dark Days for Commodity Trading

All this came to naught in the mid-1960s, following several years of fierce draughts that forced many farmers to default on forward contracts, while some even committed suicide.Side by side, with the war and shortage that it caused, the Government deemed it wise to ban forward trading in many commodities that were considered primary or essential. By the seventies, most registered trading associations became inactive, as trades in the commodities for which they were registered were either suspended or prohibited altogether.

 

Revival and Renewed Vigour

After staying relatively silent for the next 3-4 decades, commodities trading made a comeback only in the early 2000s. A few commodities were reintroduced earlier, in the 1980s, on the recommendation of the Khusro Committee but the realbreakthrough came with the liberalization of the Indian economy in the early 1990s. The Kabra Committee, which was appointed to look into the forward markets,recommended in 1994 that all futures banned in 1966 should be reintroduced,in addition to others. Six years later, the National Agricultural Policy, 2000, envisioned the removal of price controls in agricultural markets and the widespread use of futures contracts.

 

Today, with four leading commodity exchanges - Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi-Commodity Exchange of India Ltd (NMCE) and Indian Commodity Exchange Limited (ICEX), commodities trading is thriving in India, with an annual turnover of Rs 66,66,907 crore in 2016 (forthe MCX, NCDEX and NMCE till December 10).

 

Sad Truth about Post-Harvest Produce

At another level, although India is one of the largest producers of over 80% of agricultural products, including many cash crops such as coffee and cotton, harvest and post-harvest losses of India’s major agricultural produce is estimated at Rs 92,651 crore ($13 billion), according to data published by the Ministry of Food Processing Industries in August, 2016.This is largely due to storage, logistic and financing infrastructure inadequacies.

 

E-Solution in the Offing

This fragmentation of markets, even within States, hinders the free flow of agri-commodities from one market area to another, resulting in escalating the prices due to multiple handling of agri-produce and multiple levels of mandi charges. The National Agriculture Marketseeks to address these challenges by creating a unified market, with the help of an online trading platform, which functions at the State and National level. This platform promotes uniformity and facilitates streamlining of procedures across the integrated markets. It also removes information asymmetry between buyers and sellers and promotes real time price discovery, based on actual demand and supply. Last but not the least, it promotes transparency in the auction process and offers farmersaccess to a nationwide market where prices are commensurate with the quality of produce in exchange for online payment.

 

The commodities futures markets, in their current thriving form, will be the biggest scaffolding to this endeavour as it will ensure price information dissemination and also assure scope for hedging.

 

Once the teething issues get sorted out, this will culminate in availability of better quality produce and at more reasonable prices to the consumer while the farmer benefits from sale of produce at market rather than distress prices.

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