The government made an error of judgement when it barred futures trading in guar seed and guar gum in March on suspicion of “excessive” speculation. It is faltering again now, in holding back the permission sought by the commodity exchanges to resume forward contracts in these largely export-oriented agricultural commodities. Both the government and the commodity market regulator, the Forward Markets Commission (FMC), seem to disregard the simple fact that no purpose could have been served by the suspension of futures trading in these products; nor would any be served by carrying on this ill-advised embargo. The prices of these products have continued to be determined by the demand-supply fundamentals. This has been conceded, in a way, by Food and Consumer Affairs Minister K V Thomas in a written reply to a question in the Lok Sabha. He indicated that the prices of guar seed and guar gum had scaled new peaks in May this year and that the main reason for the price spike was the relatively lower production of guar seed in 2011-12 and very high export demand. The global demand for guar gum (derived from the endosperm of the guar seed) has bloated of late, thanks to its increased use in the shale-oil drilling and food processing industries as a binding and stabilising agent.
Clearly, the impact of futures trading on the spot prices of guar products was overrated. By barring it, the government has done away with a key price discovery instrument to the detriment of guar growers, whose number has swollen in response to higher demand. India is the main producer and exporter of guar products, accounting for nearly 80 per cent of the global output and trade. The domestic guar sector, therefore, cannot remain unaffected by global trends. In any case, it is hard to understand why the government needs to intervene in the guar market to arrest a price rise or to restrain volatility. Guar is neither an essential item nor an item of mass consumption. The prices of guar products, therefore, only matter to producers.
Certainly, undue speculation can potentially distort the market and, hence, needs to be restrained. However, other means can help achieve this objective, such as raising margins and restricting open positions. The real need, ultimately, is to effectively regulate the futures market, which only a fully autonomous and suitably empowered FMC can do. The FMC is currently a toothless appendage of the consumer department. The Bill to update the archaic Forward Contracts (Regulation) Act, 1952, was drafted in 2003-04, but for some reason it is still pending. This Bill also introduces much-needed options trading in commodities, which could link more farmers with commodity exchanges, allowing them to hedge their price risks. By expediting the passage of this statute, the government can ensure free, fair and transparent transactions of not just guar seed and guar gum but of all other products traded on the commodity exchanges.