7 PM | Commodities market needs a policy push | 23rd July, 2019

Context: commodities market in India.

  • India is primarily a commodity based economy having a long history of commodities spot and forward markets. The trading in the commodities market can be broadly categorized into two major segments viz., spot/physical segment and derivatives segment.
  • A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products. Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted-such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock-such as corn, wheat, coffee, sugar, soybeans, and pork.

Need for commodities market in India:

  • Agriculture: agriculture market is the most potent economic force in India. According to Economic Survey 2018-19, agriculture accounts for 15% of GDP contribution and 49% of employment opportunities. Commodity derivatives market will give further push to agricultural sector growth.
  • Doubling the farmers Income: On the production and supply side of the agricultural commodities are the farmers, whose productivity and earnings are dependent upon uncertainty and volatile factors like erratic monsoon and price fluctuations.
  • Imports: India is largely dependent on the import of a wide range of gas and petroleum products. The energy sector has its own inherent issues like lack of adequate infrastructure including transportation and storage facility and absence of an active spot market.
  • Not a key player: India is one of the largest producers of agriculture produce and raw materials like coal, iron ore and manganese. But still the commodity derivatives market contribution is only 6% of produce, where as global average is 22%. So there is scope to improve the contribution of commodity market.
  • Electronic spot markets for commodities play a crucial role in integration of localized physical market, establishing direct link between the buyer and seller and providing a transparent mechanism of price discovery. Proper price discovery will give boost to farmers Income.
  • Benefit to government: with proper and regulated market, better realization of fees/cess or levies as all trades or deliveries can be track. This could also help to channelize all information to a central data base which can help in to frame future policies.
  • Improvement in liquidity of goods on such spot exchanges/commodity derivatives may make bank finance easily available against the goods stored in the warehouse. This will improve holding capacity of the farmers/producers and in the long run may incentivize farm production and reduce rural poverty.

Issues related to commodities market in India:

  • Policy regulations: agriculture is a state subject, and the statutes to regulate transactions in agricultural commodities are Essential commodities act (ECA), 1955 and model agriculture produce market committee (APMC).
  • Under these acts state governments control the procurement, storage and movement of commodities. However, the outcome of enforcement of these regulations has often been found to be lacking in uniformity across different parts of the state and in different states of the country and in most places has led to fragmentation of the market
  • Diversity of grades: standardization of commodities is a pre-condition for transaction of commodities. However, wide quality variations in farm produce within a state, and even wider variations across states, pose a challenge for defining common quality parameters for a commodity before the same is offered for trading.
  • Assaying: Scientific assaying of commodities may take some time before they can be recorded into online trading system for trading. Lack of assaying infrastructure & regular upgradition of assaying tools limiting the growth of derivative market in commodities.
  • Ware house & transportation infrastructure: all the contracts of spot and derivatives need proper linkage of transportation and storage infrastructure. But there is no proper network of linkage among producers and traders through warehouse and transportation.
  • Institutional conflict: the reserve bank of India recently allowed business entities with direct and indirect exposure to commodity price risks to hedge in international exchanges. This conflicts with SEBIs approach to promote domestic exchanges.

Measures to improve the situation of commodity derivative markets in India:

  • Market regulations: to improve the working of commodities market in India, need a change in market regulations. Adoption of Model APMC Act by States is long overdue. And the change in existing APMC Act on the lines suggested in Model APLM Act, 2017 is critical to improve the efficiency in agricultural markets and to integrate farm level production with end-uses.
  • Multiple modes: The present system of agricultural marketing mandates sale/purchase of agricultural commodities through notified market yards. So to overcome this issue there should be multiple modes of selling of farm produce, so that farmers can sell their produce at the competitive prevailing price.
  • Farmer producer organizations (FPOs): In India, the average size of agricultural land holding is very small, and each farmer makes individual bid to sell his produce at the market yard and most of times fetches low prices due to low scale and weak bargaining power. So the government should promote formation of FPOs.
  • Storage: to get the desired price for farmer warehouse storage facilities is imminent. So government created Warehousing Development and Regulatory Authority (WDRA), and entrusted with the responsibility to register and regulate the warehouses which issue / intend to issue Negotiable Warehouse Receipts (NWRs). Presently there is a need of streamlining governance of warehousing under WDRA.
  • India does not have a regulated warehouse infrastructure for nonagricultural commodities (gold and silver) and they are left to the producers and suppliers who have their own warehousing/delivery points. WDRA should actively pursue developing rules for registration of warehouses storing non-agricultural commodities.
  • In the sectors such as base metals, precious metals, gems and stones, there is a perception of opaqueness, particularly due to the fragmented nature of the industry. Steps may be taken to improve the transparency by increased registration of enterprises, higher discipline in quality testing / assaying, financial reporting and tax payments as well as increase the share of organized sector in markets of such commodities.
  • Assaying facilities: Assayed goods are found to fetch better prices as compared to mixed/non-assayed lots. So Awareness programs for the farmers should be carried out to highlight the benefits of the assaying.
  • Improvements in e-NAM: Each eNAM/APMC market should have appropriate storage facility to provide cost effective warehousing facilities to the sellers (farmers) so as to avert distress sale. Along with that the Mode of payment should ensure prompt payment from buyer to farmer. APMC markets should move towards electronic payments.

Way forward: Commodity Derivatives markets are a good source of critical information and indicator of market sentiments. Since, commodities are frequently used as input in the production of goods or services, uncertainty and volatility in commodity prices and raw materials costs affects businesses and can be significant given that commodity prices are driven by supply and demand from domestics as well as global markets. Ability to manage or mitigate risks by using suitable hedging in commodity derivative products, can positively affect business performance. So the government should take correct measures to improve the performance of commodity derivative markets. Source: https://www.thehindubusinessline.com/opinion/columns/commodities-market-needs-a-policy-push/article28657307.ece.

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