Revoke ban on agricultural futures trade – Opinion News

This may be the most appropriate time to bring in some major reforms in the agricultural space. The advantage of futures trading has been diluted to a large extent on account of the ban imposed over the years on commodities like pulses, cereals, and oilseeds. There is no evidence to link futures trading to rising prices. In fact, the recent episode of high food inflation led by pulses and cereals have taken place even though they are not part of the futures trading basket. It is purely due to supply shortfalls, which was also the case when bans were imposed on trading these commodities in the derivatives market. At the margin, higher minimum support prices (MSPs) announced as part of routine policy has added to price increases for rice and wheat.

The government is also working hard to control fiscal deficit. The food subsidy component of around `2 trillion is primarily being used for rice and wheat, where there is an open-ended procurement process. Ideally, the government should be procuring mainly for maintaining buffer stocks. With the PM-Kisan scheme now being a fixture, a direct benefit transfer (DBT) can be provided to all beneficiaries. In fact, as the food is to be given free, DBT should work well in this situation as the choice is given to the consumer.

More importantly, the use of options on spot prices in commodity exchanges is the way out, where the farmer can choose to sell their produce if the prices are higher than the MSP. The option premium is what the government can pay to the exchanges. This will bring down the subsidy level, eschew the need for open-ended procurement, and give higher returns to the farmer. The MSP will then become the last recourse, not the first option.

In case of pulses and oilseeds, the government has made several attempts through the Budget to enable their sowing. This has not quite worked out, and products like tur, moong, soya bean, mustard, and chana have tended to have fairly volatile production trends. The restoration of futures trading as a part of policy would be appropriate at this juncture, when prices of pulses have risen considerably this year due to lower production. Futures trading would provide the right price signals for the farmers to grow more 

of a crop.

Futures prices also provide information to the government on the crop prospects, which can be used for policy intervention. For example, last year, it was a case of falling production of tur. This led to an increase in prices, which in turn led to higher imports. However, when importing from African nations, the exporters took advantage of the crisis and increased their prices too. Hence, while supplies were augmented, prices remained firm and did not moderate.

The signals from futures trading would have helped. Once the market expects crop size to be lower, there is a tendency for futures prices to move up. This can then be a point of intervention by the government. First, direct incentives can be given to farmers to increase the sowing of the crop. This would alleviate the situation, and the announcement effect of such incentives could be powerful enough to cool prices. The second point is to start reckoning imports gradually without disrupting global prices.

Therefore, there is a strong case for the government to revoke the ban on futures trading in agricultural commodities. Pulses, in particular, have provided very effective price signals on output to the market in the past. More importantly, there has been a very good segment of farmer producer organisations dealing with chana as well as value chain participants trading in other pulses like tur and moong when they were permitted almost 17 years back.

Markets are more mature and sophisticated today and the regulator as well as exchanges have gone through these cycles of bans and their revocation. The regulation is robust where it is not possible for any party to corner the market and influence prices. In fact, it is almost akin to what one sees in other derivative markets. The market surveillance systems are also strong and virtually foolproof. They have reached this state after two decades of operations. The only thing that has not changed is the policy mindset on futures trading. By having such bans, there has been a cost imposed on the farming community as well as consumers because ultimately, they end up paying higher prices.

The agricultural sector needs reforms to take it to the next level. With 40% of the workforce in agriculture, the approach so far has been to provide direct benefits through cash payments and other schemes. What worked a decade back cannot be sustained for another decade. As India moves towards becoming a developed nation, it is necessary that the farming sector resembles that of a developed nation. This would also include having markets that are robust. The eNAM is clearly the right answer when it comes to spot trading. But for development, the futures market is integral because it has been seen in the US, China, and Europe (sugar). As the markets evolve and become sophisticated, futures trading will be driving most transactions. The high degree of digital transformation in the country and literacy that is building up will enable us to harness this market and improve the overall approach to agriculture.

(The author is the chief economist of Bank of Baroda. Views are personal.)