The government's policy of interference has broken the backbone of futures market in India. With the Central government imposing new restrictions day by day, the futures market, instead of giving a boost to the agriculture sector, is on the verge of collapse now.
The government started with a ban on two varieties of pulses in futures trade. Then, a day before the Union Budget, a ban was imposed both on taking fresh positions in existing contracts as well as launching new contracts in wheat and rice.
The move impacted market sentiments and the NCDEX, the main commodity exchange, had to emphasise that it would focus more on non-agricultural commodities.
The exchange's turnover has been consistently falling since September last, when the FMC tightened screws on excessive speculations in some agricultural commodities. Interestingly, the UNCTAD had once proclaimed the NCDEX as a premier agri-futures exchange in the country.
To add to the woes, the government has set up the Abhijit Sen committee to study the impact of agri futures on prices. However, the committee's terms of reference do not include the issue of a ban on futures.
The committee held its first meeting recently and is expected to submit its report in a couple of months. The market fears that many other changes such as strengthening the FMC, the market regulator, may be delayed as a result.
The Bill amending the Forward Contracts Regulation Act is pending, as a parliamentary committee had suggested some changes, including a ban on agri-commodity futures, before clearing it in principle.
With the Bill still to see the light of day, the toothless FMC is not in a position to introduce dynamic changes and new regulations. The FMC is ready with many regulations that will be issued once the Bill is passed. Options trading and index-based futures are instruments that could provide depth to commodity futures. Such dynamic instruments can increase volumes and liquidity in the market. But, they will have to wait till the FCRA is amended.
The department of consumer affairs has recommended tax incentives such as allowing speculative losses to be set off against normal business profits. Such incentives would also encourage hedging, which is an important aspect of commodity futures. The Budget is, however, silent on the issue.
Most importantly, the government has still not cleared the FDI guidelines for commodity bourses. Many prospective FDI deals are pending for want of such guidelines.
The MCX has not been able to come out with an IPO simply because such guidelines are not in place. Commodity bourses have plans to establish spot exchanges to link farmers to markets and create competition for the state-controlled APMCs.
Currently, the APMCs are not interlinked and hence nationwide or statewide spot rates for agri commodities are not available. Organised and transparent spot markets are the need of the hour. It is imperative that individual states bring in the necessary amendments to their respective APMC laws.
Decisions such as agri-commodity futures can wait till the committee submits its report, but changes in the FCRA should be taken up with urgency to strengthen the FMC. The FDI guidelines should also be announced without any delay.
