The more things change, the more they stay the same.
Several recent decisions by the Union government bear witness to this old adage. On August 16, 2021, the Securities and Exchange Board of India (SEBI), supposedly independent from the government, suspended the introduction of a new Chana contract on the National Commodity and Derivatives Exchange (NCDEX) until further notice.
This decision came as a surprise because just a few days earlier, on August 11, 2021, the Ministry of Agriculture and Agricultural Welfare published the fourth production forecast for 2020-21. The production of Chana, a rabi plant, was estimated at 11.99 million tons, just slightly lower than the third forecast of 12.61 million tons published on May 25, 2021.
It did so on the basis of a hugely successful government intervention to increase legume production, which has increased from 19.26 million tons in 2013-2014 to 25.72 million tons in 2020-21. The MSP of Chana is 5,100 rupees per quintal and the market prices ranged from 4,500 rupees to 4,800 rupees in Madhya Pradesh, the largest Chana producing state.
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So what would have caused SEBI to ban the introduction of new futures contracts on Chana?
It seems that the Modi government, like the United Progressive before it, does not trust the futures market and regards it as one of the factors causing inflation in the commodities traded on the futures exchange. Because of this, a number of decisions have been taken in the recent past to regulate the legume trade.
On May 14, 2021, states were instructed to require dealers, millers, and importers to provide legume inventory declarations. On July 2, 2021, the Department of Consumers issued a notice imposing storage restrictions on retailers, wholesalers, millers and even importers for all legumes (except Moong). You have also been instructed to sell any shares that exceed these limits by July 31, 2021.
It is also possible that SEBI is not entirely sure of the government’s production estimate for legumes, and does not even agree with the slightly lower (4th advance) estimate of Chana production. Although the Mandi prices are below MSP, trade circles estimate the Chana production at around 8 million tons.
On August 16, 2021, the future price of Chana for the September expiry contract on the NCDEX was 5,006 rupees per quintal, lower than the MSP of 5,100 rupees per quintal. Even the long-distance contract from January 2022 was 5,562 rupees per quintal, not unusually high as the MSP for 2021-22 is also likely to be higher than the current MSP.
So SEBI’s decision seems to be based on information that is not available to the public.
It is unknown whether the decision was triggered by government concerns about food inflation. In such a situation, why should private traders buy and store farmers’ products when expectations of future prices are so uncertain. One of the most important goals of the futures market is efficient pricing and risk management.
A stable political environment is a prerequisite for the development of the agricultural futures market. The market cannot achieve volume and liquidity if policy decisions are made abruptly.
The commodity futures market in India has almost always been exposed to sudden regulatory interference. Futures trading for various commodities was suspended during the global food crisis, but the restrictions continued for several years afterwards. In several cases, the exchange has imposed very high margins on trading, ostensibly to reduce volatility. For example, the margin for potatoes was set at 100% in 2014. Chana had a margin of 95% in June 2016 and 80% for sugar in September 2016. The following table shows the history of regulatory interventions over the past 15 years.
It is important to note that Chana is the only pulse in which future trading is allowed. Other legumes such as Tur and Urad were never allowed to be traded in the past 14 years. In 2016, Chana prices in the spot markets hit an all-time high of around Rs. 12,000 per quintals in October 2016, although futures contracts were suspended at a July 2016 price when the spot price was only Rs 8,055 per quintals.
Table: Regulatory intervention in the futures market
|Mr. No.||Product group||Were||year||frequency||duration|
|1||grain||rice||2007||Never revoked||ten years|
|3||Impulses||Chana||2008, 2016, 2021||2||6 months, 1 year, ongoing|
|4th||Impulses||there||2007||Never revoked||ten years|
|5||Impulses||office||2007||Never revoked||ten years|
|6th||Oilseed Complex||Soybean oil||2008||1||6 months|
|7th||Oilseed Complex||Castor seeds||2016||1||1 year|
|8th||spices||pepper||2013||Never revoked||5 years|
|11||fiber||Raw jute||2005||1||7 month|
|12th||vegetables||potato||2008, 2014||2||16 months, 1 month (trading slump as margins are now 100 percent on both the long and short sides)|
|13th||Other||Guar complex||2012||1||14 months|
Source: Gulati, A., Chatterjee, T. and Hussain, S. (2017), Agricultural Commodity Futures: Searching for Potential Winners, ICRIER Working Paper – 349
With the suspension of future trade in Chana, there will be no way of determining the market price for any of the country’s staple foods, and the suspension could deprive farmers, traders, processors, and even the government of a reference price for decision-making.
The futures market has been viewed as a black box, although there is no convincing evidence that it affects price volatility. Our research at ICRIER (2017) showed that suspensions and other regulatory measures were taken when there was an indication of a price increase. But when prices fell, these regulatory interventions were delayed.
An efficient futures market requires the trust of participants, and such interventions have not proven beneficial. The futures markets have seen a decline since 2012, while regulatory interventions in the market increased massively.
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When the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 was passed, it was argued that it would create an ecosystem that would allow freedom of choice in the sale and purchase of agricultural products. This should help farmers to obtain reasonable prices through “competitive alternative trade channels”. One of the basic hypotheses that drive market reforms was to free farmers and other interest groups from unnecessary interference and regulation and thus allow market forces to work unhindered in pricing.
It seems that within a year of the enactment of the three agricultural laws, we have come full circle and are returning to sudden regulatory intervention.
Siraj Hussain has retired as the Union’s Minister of Agriculture. He is currently a Visiting Senior Fellow, ICRIER. Tirtha Chatterjee is Assistant Professor at the Center for Development Studies, Thiruvananthapuram.