Commodity vision

Agricultural marketing will not be the same if the new initiative of setting up a national-level electronic exchange for spot trading in commodities succeeds in functioning the way it is intended to.

Called the National Spot Exchange for Agricultural Produce (NSEAP), the new marketing venture aims at linking all agro-marketing cooperatives and other physical market players to an electronic platform for buying, selling, storing, transporting, and payment.

Essentially, the NSEAP is a nation-wide infrastructure company engaged in enabling buyers and sellers to trade in agricultural goods through the extensive network of business access points that it will create.

The new exchange is also supposed to disseminate reference national spot prices on a real-time basis. It will, thus, serve as an instrument for common national price discovery for the benefit of farmers and customers, including the end-users of commodities.

Significantly, the government, as also the Forward Markets Commission (FMC), views this initiative as a step towards the creation of a country-wide common agricultural market, a commitment made by Prime Minister Manmohan Singh in his maiden address to the nation.

The exchange is being launched jointly by the Multi Commodity Exchange(MCX), Financial Technologies (India) Ltd and the National Agricultural Cooperative Marketing Federation (Nafed), all of which are also the promoters of the MCX, a commodity futures trading exchange.

The State Bank of India has offered to serve as the principal clearing and settlement bank of the new spot exchange. The MCX is already doing a daily business of over Rs 1,000 crore.

Though the spot exchange will be an independent institution, it will doubtless stand to benefit from the promoter organisations' large marketing infrastructure.

Prima facie, all this sounds good, but it is a wholly new concept and, as such, the fear of the unknown cannot be totally disregarded.

It is not yet clear whether the new exchange will be brought under the scanner of the FMC, or some other regulator will be put in place. Spot trading is substantially different from futures.

It requires actual delivery of the product while physical delivery is quite infrequent in futures trading. The absence of a vigilant regulator can expose even a seemingly transparent electronic market to manipulation by vested interests.

Besides, a national common market would necessarily require uniform rates of local taxation. This is not the case at present. Of course, the proposed VAT regime can help reduce inter-state variations in taxation and prices, but the introduction of this regime still needs to cross several hurdles.

Similarly, the current diversity in state marketing laws can also create problems for a smooth functioning of the new spot exchange. Not many states have modified their agricultural marketing statutes in line with the model Act circulated by the Centre.

Though several others have either initiated action on this front or have expressed their commitment to do so, a countrywide uniform statutory marketing regime is still to be put in place.

Unless these and other conceivable impediments are removed, the emergence of a single national spot commodity market may remain a cherished dream.