The Tata Institute of Social Sciences (TISS) in association with the Multi Commodity Exchange (MCX) conducted a study to check the impact of commodity futures markets in India on farmers. The study concluded that the futures markets were able to dismantle powerful trading cartels in potato and mentha (mint) oil. It also helped farmers take a more broad-based decision on production, storage, and marketing of farm produce.
The study analysed other stakeholders of the commodity exchange and showed the exchanges have helped a number of brokers, traders, and producers – who are first generation economic beneficiaries of commodity markets – expand their business.
Given this positive information, it is unfortunate to see commodity exchanges in India struggling for survival. A news report says that volumes in commodity exchanges have fallen to their lowest levels since 2010. They are presently at one-third their peak levels touched in 2013.
There are many reasons for the sharp drop in business volume. The first body blow came when the government decided to introduce commodity transaction tax (CTT) on commodity trades. Since a substantial portion of the volume on the exchange was on account of arbitragers and jobbers, CTT made their trading non-remunerative. Repeated pleas by the exchanges to the Finance Ministry have gone unheard.
As a result, out of the six commodity exchanges that were active before CTT, three of them suspended business. Half of the active members in the remaining exchanges also moved out of commodity trading.
As if the tax was not bad news for the exchanges, the scam and wrong practices of National Commodity and Derivatives Exchange (NCDEX) broke the back of commodity market. NCDEX episode resulted in government tightening the screws on the operations of exchanges. Forward Market Commission (FMC) was merged with stock market regulator Securities and Exchange Board of India (SEBI).
The direct impact of lower participation and lower volume resulted in commodities being in the hands of manipulators. Castor seeds market saw cornering of the commodity by a handful of players. The fraud came to light when these players defaulted on their commitment to pay. These players collectively held two-thirds of the open position in castor seed contract, totaling Rs 540 crore. Their position incidentally was nearly 10 percent of the country’s castor seed production. Other commodities have also seen such manipulation.
Lower volume makes it easier for a commodity to be manipulated. Unless there is enough liquidity in the market the very purpose of a market place – that is a transparent price discovery is defeated, causing more harm than good for all stakeholders.
India is a major consumer of most non-agriculture commodities and one of the largest producers of several agricultural commodities. This makes the country best suited to have a buoyant commodity market.
What’s more, the Indian government needs a buoyant and transparent agriculture market than any other players. A series of loan waivers over the last two years have been a result of poor monsoons which damaged the crop and good monsoon which resulted in prices of the commodities crashing resulting in losses for the farmers.
A liquid market would have ended with farmers taking advantage of the pricing on the exchange by hedging their output. But the way things stand currently, hedges account for less than 1 percent of the trades in two of the top commodities exchanges, according to SEBI.
A long-term solution to the agri problem can be found in a well-managed exchange and education and active participation by farmers, either individually or collectively.
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