'Farmers will benefit the most'

Q&A: Jignesh Shah

Jignesh Shah

With 70 per cent of the population in rural areas, it's obvious that commodity exchanges will affect a lot more lives than the stock market. Jignesh Shah, managing director of the 21-month old multi-commodity exchange MCX talks to Business Standard on its impact. Excerpts:

What makes you so bullish on commodities?

The grand commodity saga dates back 2,500 years, maybe even earlier. You find reference to commodity futures even in Kautilya's Arthashastra. India was an active commodities' trading hub and, in fact, it is for the lure of commodities that Vasco da Gama came to India. So commodities were, are, and will be, the base of Indian prosperity.

How do you see the commodities markets unfolding over the next few years?

For the past 40 years, commodity futures were banned and the market was fragmented. So, what we did not have is a hedging mechanism or a private insurance policy. But thanks to government policies, commodity futures trading is allowed now. The futures market is ideal for price discovery and price management but that is only the tip of the iceberg.

The framework that has been created now matches that of the US. It encourages de-mutualised commodities ventures that have to be professionally operated like a company. In India, MCX is a good example of this model. It is a commercially-viable private-public partnership.

Essentially, this approach to renovate the agricultural sector will help integrate the country and build a solid Indian market for commodities. First you have to create the electronic linkages and a transparent tradable market. Once that is in place, you can trade spot or the physical goods on that platform to integrate all APMC mandies.

For now, the next logical step is integrating the various fragmented parts. Any thing that falls under the broad range of commodities would be integrated with the financial services industry. When a uniform market comes to the fore it will unlock a huge hidden wealth.

How much wealth could be unlocked?

According to a study done 10 years ago on 17 commodities, if there was a common Indian market, you could unlock a wealth of $9 billion. Now if you take at a look at 100 commodities in today's scenario, which have good export and import links, I am sure the figure will be mammoth. This could also lead to creation of a rural employment in the true sense.

That, in turn, will lead to rural entrepreneurship as an offshoot. There are a whole lot of other areas where opportunities will arise, such as commodity price insurance, crop patterns, and so on. This will reduce the load on urban centers and create so much more employment.

Essentially, you are saying that we should have a commodities market much like the equity markets?

Yes, in the case of futures market. But when we look at spot markets, the situation is different. In commodities we have 7,500 structured APMC mandis with each having around 2,000 agents catering to the end farmer. Now when you reform this and create a common Indian market, which caters to information, advices and prices, bank finances will be easily available.

They can exchange their price volatility on futures trade. That ecosystem, when it penetrates the interiors of India, will make all the difference. The surplus this gives to the end farmer will again add to his purchasing power and that is where the overall economy is going to boom.

What is the biggest strength of Financial Technologies (FT, which owns 65 per cent of MCX, was founded by Shah in 1995, and provides transaction automation technologies for equity, derivatives, forex and commodity markets. It is also setting up an exchange in Dubai with the Dubai government)?

The biggest benefit we have is that we understand technology and the domain quite well. Despite being an infrastructure project, we broke even in the very first year. Normally, it would have taken three to five years. We are happy to say that we paid a Rs 4.5 crore as tax, and also declared a 10 per cent dividend.

Despite there being head room, banks have not been too forthcoming in lending for equity purchases. Why do you think it will be different for commodities?

Unlike equity, I think commodities touches more lives "" 700 million people in this country, to be precise. Second, this is the only way the country can become an economic super power. It cannot become prosperous by supplying software services or biotechnology simply because it does not touch the masses.

Also, commodities are a less volatile asset class than equities. You will not find commodity prices falling to one-tenth of the value, for instance. Earlier, banks did not have opportunities to cover their risk by hedging by using futures, which is now available.