Banning Futures in Agri is not a solution

Parliamentary panel has recently submitted its report to the government and has advised to the government to ban futures trading in agro-products. The reason given is that it leads to artificial rise in prices and does not benefit the Indian farmers. About 82 per cent of the farming community in India constitute of small and marginal farmers. These farmers are unable to take the advantage of forward trading and therefore, they need to be protected against any sharp fall in prices. The committee further pointed that futures trading has not been beneficial to farmers. It is the traders and middlemen who are earning at the cost of the farmers.

The panel’s view came as a shock and led to the fall in the futures market. On my earlier blog, I had written about why government should remove ban from certain commodities that were banned earlier. To a certain extent, it is true that farmers don’t benefit from the futures trading. But, there are indirect affects. They get a brief idea about what the prices are prevailing in the market. Though, this is debatable, let us not debate on this. Rather, I should ask you, would banning futures trading in agro-products heal the farmers’ problems. The answer is no. Different farmers have different problems. Small and marginal farmers cannot even afford to look at futures trading. Same is the case for equity market. So first, we must understand the purpose of this market. The purpose is price discovery. So, is it performing its function.

Let us examine this. The prices for various commodities have rose across various markets, both national and international. Prices of commodities reflect the demand and supply situation in any market. Or else, how can you explain the rise in cotton prices even after government had abolished the import duty on it. On my earlier blog, I had written about why government should remove ban from certain commodities that were banned earlier. The inflation that we are talking about is mostly imported. The rise in oil prices directly and indirectly lead to increase in prices for various commodities.

Inflation problem is not only confined to India. Almost every emerging economy is faced with this. Will the inflation rate come down after the ban? On the contrary, inflation has further increased even after the ban of certain commodities. Banning futures trading will not help. A study by NCDEX on various commodities (on my earlier blog) a few months back revealed that even after the ban prices for many essential commodities rose sharply. This reflected supply side problem. With the rising crude oil prices amid fear of depleting reserves, developed countries like US have shifted a major portion of corn and other agro-products for bio-fuel making. This has led to fewer stocks available for trade. Prices of edible oil are high because, due to high prices of crude oil, more and more vegetable oils are being diverted for use as bio-fuels. India imports soy oil heavily so, its prices in the domestic market therefore, depend on the palm oil production in Indonesia and Malaysia and soya bean production in the US, Argentina and Brazil. Moreover, rubber is an industrial commodity and not an essential one, and therefore it doesn't contribute to higher inflation. India also imports pulses heavily from abroad. Hence, price control is beyond its reach. Thus, earlier ban on commodities was a mistake that government committed under political pressure. It had nothing to do with inflation.

The other major issue is lack of knowledge. Government every year comes out with Minimum Statutory Price (MSP) for various agricultural products like wheat, rice, etc. So, do farmers get any benefit from it? The reality is that only big farmers get benefits who have large farmlands, and have knowledge of such MSP. What about small farmers who don’t know about MSP; neither he can approach government with his small amount of produce. So, the solution is not scrapping MSP because all farmers are not benefiting. The solution is to educate them. As, I have mentioned earlier there are indirect benefits of MSP. Farmers sell their produce to the middlemen who either sell to government or come to futures market for trading. So, the role of futures market becomes essential. The prices that are prevailing in the market give brief idea to the farmers at the time of sowing. They can then take their own wise decisions depending upon his analysis of the situation. Speculators are given a chance to participate to bring liquidity and stability in the market.