Sen panel for better regulation, more participation by farmers

Sen panel for better regulation, more participation by farmers
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First Published: Tue, Apr 29 2008. 11 52 PM IST

Updated: Tue, Apr 29 2008. 11 52 PM IST
New Delhi: The draft report of the expert committee on futures commodity trading, headed by Abhijit Sen, has recommended better regulation and participation by farmers in the commodities market even while saying that there was no evidence to suggest that futures trading stoked inflation.
“I don’t think one can conclusively say futures impacted prices,” Sen, who is also a member of the Planning Commission, said. The committee was set up by the government to examine this link.
Noting that foodgrain had at no point accounted for more than 6% of total volume of futures trading in agricultural commodities, the panel made a case for actually enlarging futures trading. “Despite recent growth, the existing volume of futures trading for most agricultural commodities is still relatively low compared to international norms on the ratio of volume of futures trading to production,” it said
But the report, submitted to minister for agriculture, food and consumers affairs Sharad Pawar, added that while futures trading has risen, risk management techniques have not improved correspondingly.
“The reason for this is high basis risk in most contracts, which keeps out potential hedgers and leads to greater dominance by speculators. This is a serious area, which should be addressed both by exchanges and the regulator, with particular attention to the possibility that speculation in the present open economy context may be driven by differences between domestic and international prices.”
There are four major commodity exchanges in India; the Forward Markets Commission (FMC), which is part of the ministry of consumer affairs, regulates commodity trading.
“In order to avoid disruptive ‘go-stop’ responses that neither serve the public purpose nor growth of markets, it is necessary to take a clear position regarding essential commodities, particularly food-grain, where government currently has a large and all embracing involvement in physical trade,” said the report.
It added that before the government takes any decision to revive futures trading in four recently delisted commodities—rice, wheat, urad and tur (pulses)—it should set out its plans for the existing system of public procurement and public distribution system.
It has also recommended reforming physical spot markets and bringing them under the purview of a central regulator. At present, they are overseen by agricultural produce market committees in various states.
The committee has also proposed creating a consultative group of experts to advise FMC about the need and rationale for futures trading. To enable farmers to use agri-futures markets to transfer their price risks, it has suggested easy designing of contracts and ensuring greater awareness.
Last week, the committee decided that besides the main report, comments of individual members would be submitted. Other members of the panel are Sharad Joshi, member of Parliament; Prakash Apte, professor at the Indian Institute of Management (IIM), Bangalore; and Siddharth Singh, professor, IIM, Ahmedabad.
In his note, Apte said: “We should clearly state that the evidence regarding the causality from futures prices to spot prices is at best ambiguous. Hence, futures trading cannot be treated as responsible for rise in spot prices. Supply factors as well as global price trends are the major causes.”
“It (the report) had put to rest all the confusion about futures trade being responsible for spot price hike. I think the futures trade is here to stay in India as a real price discovery mechanism. The government should improve electronic spot markets, warehousing and logistics to strengthen the futures market,” said Jayant Manglik, head of research at Religare Commodities Ltd.
Reuters contributed to this story.
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First Published: Tue, Apr 29 2008. 11 52 PM IST