The recommendation by the standing committee on agriculture to discourage futures trading in farm commodities needs to be treated with caution because it is not an unambiguous position. The panel’s argument that speculative trade leads to an artificial rise in prices is a contentious one that will find both strong critics as well as those in agreement. Indeed, the committee recognises the limitations of its position when it concedes, even while expressing misgivings about futures trading, that it offers a good hedging mechanism. The committee has also pointed to the obvious by calling for a stronger forward markets regulator for commodities, on the lines of the Securities and Exchange Board of India (Sebi) for the stock markets. Taken together, these observations reflect recognition of the benefits that accrue from futures trading as well as the risks that it entails —witness the global surge in oil prices as speculative money has rushed into oil futures. However, even in the case of oil, many experts argue that the spot market has not been affected by what goes on in the futures market — though that sounds self-defeating when the whole point about futures trading is supposed to be that it aids price discovery.
The Abhijit Sen committee, which looked into the impact of futures trading on prices, would surely have taken into account the role of speculation when concluding that there is no firm evidence of any direct connection between a price rise and futures trading. The fact that as many as eight key agro-commodities, including foodgrains, some pulses and edible oils, potato and rubber, have been barred from being traded in the commodity exchanges while their prices have continued to rise, supports the thesis that the villain of the piece is not necessarily futures trading. But now that the committee has given its report, the issue moves beyond first principles. At issue now is a concrete step like making permanent law the now lapsed ordinance that had given teeth to the commodities regulator, an ordinance that was allowed to lapse under pressure from the Left parties.
Even those who argue in favour of permitting futures trading are forced to concede that all is not well with the present arrangements for trading in commodity futures. Though this market has expanded some 50-fold in the past five years, it has neither been able to elicit farmer participation nor effectively perform its basic function of facilitating hedging, price discovery and price stability. The reasons for this are well known and have been mentioned in the reports of both the Abhijit Sen panel and the parliamentary committee. For one, the infrastructure and the capability of the commodity market regulator, the Forward Markets Commission (FMC), have not been upgraded in tandem with the growth of the futures market. This creates the room for situations where speculators can have a field day, as with guar gum. Also, the format of the contracts created by the exchanges may attract speculators rather than genuine traders. Factors like the large size of contract units, high margin money requirements, mandatory demat accounts and the like automatically deter farmers and small commodity players from trading through the exchanges. On top of that, the plethora of curbs, controls and market-distorting interventions, besides the want of options trading in commodity derivatives, deny markets the freedom necessary need to function effectively. What is really needed, therefore, is to strengthen the regulator and expand the scope of futures trading in a measured fashion.