TeaThere are at least two areas of economic regulation in agricultural markets in which the Narendra Modi government agrees with the Manmohan Singh government. The first is the frequent use of the Essential Commodities Act to examine inflationary trends in the food economy. The second is the mistrust of future markets for price discovery of agricultural commodities.
The table below shows the suspensions imposed on future business by various governments in India.
On 16 August, the Securities and Exchange Board of India (SEBI) decided to suspend the launch of any new contracts, until further orders. Gram and mustard seeds on commodity exchanges. The decision was not due to high inflation Gram, In fact, the market price of gram in the major producing state of Madhya Pradesh was around Rs 4,500 to Rs 4,800 per quintal against the MSP of Rs 5,100 per quintal. In the last one year of the ban on futures trading in GramPrices mostly remain below MSP.
figure 1
The big blow to futures trading, however, came in December 2021, when SEBI barred commodity exchanges from launching futures contracts for seven agricultural commodities for one year – paddy (non-basmati), wheat, gram, mustard and Its derivatives, soybean and its derivatives, crude palm oil and mung bean. Even in ongoing contracts, new positions were not allowed and only repayment of existing contracts was allowed.
In the case of wheat, moong and paddy (non-basmati), trading volumes were negligible, even though these contracts were available on the exchanges.
Read also: India’s pulse problem – open import policy hurts prices and farmers
What are the restrictions imposed on Indian futures trading?
It is to be noted that in December 2021, the lower size of the wheat crop was not anticipated and in fact, India was expecting a bumper crop. By the end of April-May 2022, senior government officials were not only encouraging wheat exports from India, but also believed that the country could fill the gap in global wheat supplies created by the Russian war on Ukraine. , which resulted in a complete halt of the wheat of Ukraine.
During the peak sowing period of Kharif crop (June-July 2022), farmers had no idea about the expected prices of their crops at the time of harvest. Despite non-availability of price signals, farmers have maintained soyabean acreage at last year’s level while tur, moong and urad Has come down (as of 19 August 2022).
As a result of restrictions on future trade, commodity processors—for example, soybean oil manufacturing units—are not able to hedge their supplies against price fluctuations. In addition, they have to depend on mandis (spot markets) for supplies. Another consequence of the persistent restrictions and restrictions on future trading in commodities is that commodity exchanges have not been able to develop to their full potential, even though India and China may have similar commodities on future exchanges. For example, sugar, soybeans, palm oil and rapeseed are also major commodities on the sugar futures exchanges.
Globally, the Chicago Board of Trade (CBOT) is the largest commodity exchange in terms of trading volume. In the case of corn, as of March 2022, the open interest on CBOT (number of active or outstanding contracts) accounted for about 56 percent of the 348 million tonnes of corn produced in the US. In the case of soybean and its products, the open interest was 33 per cent of the output. China’s Dalian Commodity Exchange has an open interest of about 18 per cent in corn. For soybean meal, it was 25.8 per cent.
Due to repeated sanctions and restrictions, the Indian futures market has not developed to its full potential and, in 2022-23, due to suspension of contracts till December 2022, trading of agricultural commodities on the exchanges has reduced significantly.
Read also: Inflation is cutting your pocket? There is more in the pipeline. but god can help
time to lift
Media reports There are suggestions that the Modi government is considering a reduction in import duty on wheat (currently 40 per cent) so that private flour mills in South India can replenish their stocks. Wheat inflation is in double digits both at wholesale and retail level. It is quite ironic that importers would use the Chicago Board of Trade (CBOT) and other exchanges to hedge their supply.
In the last few years, Farmer Producer Organizations (FPOs) have also started using commodity exchanges for hedging and selling of their produce. Even though the number of such FPOs is very less and the volume of business is negligible, there is a need to empower them so that they can take advantage of modern tools of price discovery and trading in commodities.
From time to time, using the Essential Commodities Act, the government makes it mandatory for traders, wholesalers and even retailers to declare stocks of essential commodities (such as pulses and oilseeds in recent years). If the registration of warehouses with the Warehousing Development and Regulatory Authority (WDRA) becomes mandatory, this cumbersome process for declaration of stock will not be required.
It is expected that the Modi government and SEBI will soon take a well thought out decision to lift the ban on future trading of agricultural commodities. The ecosystem envisaged by the Warehousing (Development and Regulation) Act, 2007 has not developed to the desired level as the registration of warehouses with WDRA is still not mandatory. Trade in agricultural commodities stored in warehouses can be formalized by using Electronic Negotiable Warehousing Receipts (NWRs) instead of physical receipts issued by the warehouses.
Hussain is a former Agriculture Secretary to the Government of India. Saini is an economist. He has promoted Arcus Policy Research, a think tank on the economy. Thoughts are personal.