Cart before the horse?

BS OPINION

The broad commodities sector, including non-agro commodities and bullion, has in the past accounted for something like half the country's gross domestic product (GDP).

Yet this sector has seldom attracted investors' attention the way it has started doing now. This is attributable largely to the introduction of futures trading in most commodities, including gold and silver.

Already, the commodities exchanges across the country are reporting an annualised turnover of a whopping Rs 1,40,000 crore. This volume is set to multiply manifold in the coming months as trading in the new and not-so-new exchanges gets stabilised.

Trading in commodities has some tangible advantages over dabbling in shares. For one thing, price volatility is much less than in the case of shares, bonds and other financial instruments. The factors that influence commodity prices are also fewer in number and easier to understand and interpret.

In the case of agricultural goods, these relate primarily to the weather, the demand-supply scenario, government actions by way of subsidies and taxation, and international trading norms that are now guided by the World Trade Organisation.

In the case of non-agricultural commodities, including non-ferrous metals, prices are influenced mainly by production, mining, stock inventories, tariffs and taxes. The case of gold, however, is different as it is also treated virtually as money even in international transactions.

That makes it globally the most hedged as also the most speculated commodity. This apart, thanks to the larger number of players in the commodity trade, notably the presence of producers, consumers and investors, the impact of price-influencing factors is discerned rather quickly, to the advantage of all the players.

There are other dimensions to this issue, some of which are cause for caution. The most significant among these is the market's preparedness "" or lack of it "" for this kind of inherently speculative trading. In an economy replete with unaccounted money, speculators can potentially take the market for a ride in the absence of vigilant regulators and monitoring agencies.

From this point of view, the Forward Markets Commission needs to be strengthened substantially. Its infrastructure needs to be expanded to have at least one centre in every town that has a commodity exchange. The other worrisome factor is the lack of marketing reform.

What is required is not only the removal of the controls that the government has imposed, along with market-distorting mechanisms like minimum price fixation and procurement, but also changes in the agricultural produce marketing laws that are in force in the states.

Without these changes "" which are urgently required, since futures trading has already got under way "" the whole enterprise can get derailed.