Insight
COMMODITY EXCHANGE MARKET IN INDIA
by Manish Srivastava
MBA (IT), IIIT Allahabad
There is a lot of whim and fancy in the political scenario of India by the opposition parties and some of the ruling party’s members, on the futures trading market. They blame that these market activities are responsible for increasing prices. Are the increasing prices really a big issue? In India, governments come and go from power on such issues. Recently the defeat of the congress party in state elections shows how intense these matters are in India. That’s why political parties are in trouble.
To understand the future market or commodity exchange market we first have to understand the Indian market system. Market structure in India for commodities is much dispersed. The market is doing its functioning in a traditional manner. There were a lot of mediators between the end user and producer who make-up a long supply chain. As the stages increase, the cost for the product becomes higher and higher for the end user. But this not means that the farmer or producers are getting a good worth for their production, it is the mediator who is making a huge sum of profit in these transactions. Unavailability of any common platform for producer’s sales, the farmer has to go to local mandi’s to sell their produce. In these mandi’s there are mediators who purchase the produce, and there is the end user as well, but these end users have little capacity to purchase. So in these mandi system, the mediators offer the farmer a very low price for their produce, definitely no one would like to sell their hard earned produce on a low price, but the problem is with the producer’s accessibility and the lack of a common platform.They do not have good procurement houses, so they are compelled to sell their produce. The mediators take full advantage of this, and purchase their produce on minimum price. A very good example is of onion which is a very commonly used vegetable in the Indian kitchen. The farmer gets Rs.2-3 per kg. Market Price for the same product is Rs.12-13 per kg. Now one can imagine how huge the difference is and where all the money goes. Farmers were not getting the right price for their production. Government tries to regulate these activities by fixing a Minimum support price(minimum support price is the price on which government assures to purchase all the production of farmer’s ,this is like a protection scheme) for all commodities.
Government changes the licensing policy for commodity markets and it becomes open for companies to purchase the agricultural goods directly from the producer. Companies started various techniques to purchase the goods, ITC’s e-chaupal was a tool .Now companies directly go to the farmers for purchase of their production, various centre have been formed. Farmers also have it in their favor as they don’t have to bother about their sales as they get a good price for their produce. In future trading market companies purchase all of the farmer’s production in advance, they negotiate on a certain production and a price with farmer. The farmer will give all his production to that company directly on the price which has been fixed .It is profitable for both the company and the producer, the producer is getting the money for that crop which they have not as yet sowed .This system looks like dadni system which was in India a hundred years ago, the difference is that at that time farmers were compelled to do so, but now they are doing it of their own free will.
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952
"The Act Provides that the Commission shall consist of not less then two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises three members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the Commission."
The functions of the Forward Markets Commission are as follows:
(a) To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
(c) To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;
(d) To make recommendations generally with a view to improving the organization and working of forward markets;
(e) To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. There are 25 commodity exchanges, out of these the MCX, NCDEX and NMCE are large exchanges and MCX is the biggest amongst them all.
The turnover of commodity exchanges in 2006-07 financial year is likely to touch a whopping Rs. 37,00,000 crore against just Rs. 5,70,000 crore in 2004-05.
According to the commodity market regulator Forward Markets Commission, the total turnover of all the 23 national and regional bourses stood at Rs 35,08,856 crore till March 15 of 2006-07 fiscal.
The three leading national bourses - Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and National Multi Commodity Exchange of India (NMCE), which together account for nearly 94% of the total business.
The government banned futures trading in wheat and rice on February 28 when the Budget was presented in Parliament while announcing a freeze on launching new contracts till an expert committee submits it report.
A five-member committee headed by Planning Commission Member Abhijit Sen has been asked to study "the extent of impact, if any, of futures trading on wholesale and retail prices of agricultural commodities" and submit its report within two months.
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expressed in the articles are author’s own views B’Cognizance or
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The matter here is solely for academic use only.