New Delhi: The Abhijit Sen committee examining whether futures trading contributed to the unexpected spurt in prices of agricultural commodities in 2006, will not advocate a ban on such trading.
“There is no question of us suggesting a ban (on futures trading); it is anyway not in the terms of reference of the committee,” said Sen, a Planning Commission member and chairman of the committee.
Sen said he would submit the report by the end of this month, after the full committee deliberates the findings.
Other than examining the extent of the impact of futures trading, the terms of reference expect the committee “to suggest ways to minimize the impact” and make recommendations for “increased association of farmers in the futures market/trading so that farmers are able to get the benefit of price discovery through commodity exchanges.”
The main input is a voluminous, detailed review of the reasons for retail and wholesale price variations and the impact of futures trading in wheat, chana (gram), tur (pigeon peas), urad (black gram), sugar, guar and rice by the Indian Institute of Management, Bangalore.
Gopal Naik, the IIM professor who prepared the review on behalf of the Forward Markets Commission (FMC), said in a telephone interview: “Banning is always a very harsh measure. It is easy to close down the market but difficult to re-establish the confidence of the buyers and sellers.”
The report, described by Naik as “interim”, has found that though there was volatility, they were triggered, except for rice, by supply shortfall, high global prices and seasonal factors, and not so much due to futures trading. The data for rice were not enough to prove any volatility, Naik said.
In fact, the report argues, the futures contracts were not able to stabilize prices because of lacunae in the system and lack of strong farmer participation.
The spot market in these commodities is not efficient, Naik said. “There is no grading of commodities without which the cash-futures link cannot be strengthened. Also, there is still no system of warehouse receipts,” he added.
Apart from Sen, the committee includes peasant leader and MP Sharad Joshi, IIM-Ahmedabad professor (and independent director on the board of the National Multi-Commodity Exchange of India) Siddharth Sinha, IIM-B director Prakash Apte, and FMC acting chairman Kewal Ram.
The committee, announced by the finance minister in his Budget speech on 28 February, was to submit its report in two months but has sought two extensions.
The finance minister had announced the committee, while declaring that he was taking out wheat and rice, too, out of the futures market, following up on the FMC ban on futures contract in urad (black gram) and tur (pigeon peas) pulses on 23 January.
The report also found that farmer participation in the futures market is minimal, due to high margins, demat trading and mandatory use of permanent account numbers. Overall, it feels, that a reformed futures market would go a long way in arresting price volatility in staples. The repeated extensions have obliquely meant that future contracts in these commodities remain suspended, although Sen feels that “the impact of the ban has not been significant.”
But exchanges, which want the government to lift the ban, argue that after the ban, neither wheat nor pulses prices have come down significantly.
Madan Sabnavis, chief economist with National Commodities and Derivatives Exchange says: “The price trend of wheat and pulses in the physical market since January has proved that the forward market had been giving the correct indication of future price movement. Prices of both wheat and tur have actually gone up in the physical market due to shortage.”