The proposed amendment to the law will help speculators, not farmers.
Commodity futures exchanges and market participants are clamouring for introduction of ‘options' trading in commodities, in addition to futures, and the policymakers seem to be going along, unaware of ground realities. The government has, perhaps, been led to believe that introduction of ‘options in goods' will benefit farmers.
Do farmers need ‘options' trading? This question is being debated in the context of proposed amendments to the Forward Contracts (Regulation) Act, 1952, (FCRA). The Amendment Bill was introduced in the Lok Sabha almost a year ago, and is currently being examined by the Parliamentary Standing Committee for the Department of Consumer Affairs.
IN THE NAME OF FARMERS
In the last session of Parliament, the Minister of State for Consumer Affairs, Food and Public Distribution had answered in the affirmative to a question on whether the government proposes to change/amend the existing FCRA (Foreign Contribution Regulation Act) to allow ‘options' trading.
The proposed amendment, among some others, seeks to introduce ‘options' in goods. ‘Options in goods' as a method of commodity trading was banned sometime in the mid-1960s, and has remained so for more than five decades.
And rather ironically, some of the conditions that prevailed at the time of imposing a ban exist currently: uncertain output, demand-supply mismatch and high level of food inflation.
Explaining the benefits likely to accrue to the farmers, the minister said, “(Options) will provide farmers with a risk management tool, which is more suitable for farmers who aren't trading on a daily basis. In ‘options', farmers aren't required to monitor the futures prices on a day-to-day basis, nor do they have to keep paying or receiving daily margin differences to/from exchanges, till the contract is settled.”
The government's belief could well turn out to be fallacious and erroneous. For one, farmers — much less the small and marginal farmers who constitute more than 80 per cent of Indian peasantry — don't trade commodity futures on a daily basis. Their notion of risk management is vastly different from that of traders and some other market participants.
The farmer wants to produce his crop without risk of climate uncertainty, as well as risk relating to input availability, quality and price. When he is ready with the harvest, he wants risk-free or assured marketing and remunerative price. ‘Options trading' in harvested produce certainly won't provide any assistance before harvest, and post-harvest it cannot guarantee remunerative prices.
ROLE OF SUPPORT PRICES
The Minimum Support Price (MSP) the government announces actually performs the function of ‘options' trading. As the expression itself suggests, MSP is a guarantee given by the government to the grower, that in the event of the open market price falling below the specified MSP, the grower is assured of at least the MSP and nothing less. Indeed, the government is under obligation to purchase from the grower at MSP should market prices prevail at, or fall below, MSP.
On the other hand, if the open market price is above MSP, the grower is under no obligation to surrender his goods to the government. He is free to sell to anyone in the open market at prevailing prices above MSP.
When the system of MSP is prevalent to safeguard the interests of growers, there is no need to introduce ‘options' trading, that too, in the name of the farmer, who actually does not need it. It is, of course, a different issue if our price support operations are efficient. Surely, there is case for strengthening the price support operations by designated agencies.
Policymakers in New Delhi, and elsewhere, should know that nowhere in the world do farmers trade commodity futures. They may take a cue from futures prices, but seldom trade on the bourses. In India, farmers want to simply dispose of the produce they bring to the market yard at the best possible price and return home with the money.
Instead of indulging in non-essential and non-priority activities such as introduction of ‘options' trading, the government must demonstrably strive to build capacity among growers to produce more, to lower production cost, to produce better quality and meet the growing and specific needs of the market.
If introduced, ‘options' trading in agricultural commodities will turn out to be yet another avenue for speculation by market participants, many of whom may have no clue how farm goods are actually produced. Policymakers shouldn't get carried away by academic or pedantic arguments.
The Hindu
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