[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
power and reinvestment of profits back
into farming. However, a large chunk of
medium, small, and marginal farmers
are still to come out of the clutches of
the operation of this vicious cycle. Hence
the need of the hour is to provide market
based solutions to these farmers that
could address the problems associated
with inefficient and opaque markets;
poor infrastructure including input supply
systems, low credibility among the
lending institutions, poor infrastructure
especially in terms of transportation,
warehouses, standardization and quality
testing facilities, low value addition and
a rather weak agricultural extension system,
among others. Though there are
production related issues that would
need to be addressed, we believe it could
be effectively tackled by equipping the
farmers through market based empowerment.
Remedies for these challenges
can be approached by classifying them
into two broad categories — marketing
system ills and infrastructure challenges.
As for addressing the infrastructure
challenges, increased private investment
could well be the answer, at least for
overcoming them partially in commercially
profitable areas. However, in the
current marketing system wherein a
large number of middlemen are involved
in the supply chain, prices are largely
determined by traders with immediate
consideration to their profits. This eventually
leads to lesser returns on agriculture
making private investments in agriculture
least remunerative.
The current marketing system in the
country leads to large price spreads suppressing
the prices of commodities actually
offered to the producers while inflating
the prices that the end consumers
are made to pay which often has no relation
to the value addition that the products
had undergone. This could be attributable
to lack of transparency in the
market and an inefficient price discovery
mechanism. Farmers in most of the rural
areas arrive at the market uninformed
of the market situation due to lack of effective/reliable
market information dissemination
systems. Adding to their
woes, farmers more often take sowing
decisions based on the prevailing prices
(unaware of the future price directions),
which would most often prove them
wrong. Thus, remunerative prices for
their produce remain ever elusive to
farmers and remain a major cause of the
current stagnation in agricultural
growth. In other words, the lack of motivational
factor i.e. dwindling returns
to labor and investment is the key reason
for this stagnancy. Increased profits
would be possible only if farmers were
provided fair prices that are reflective of
their supply and demand.
Reforms On Anvil: Move towards
Market Based Mechanism
In a perfect market, price is determined
by the forces of demand and supply (fundamentals).
Frequent changes in the
fundamentals lead to increased price
volatility. In order to make the agriculture
sector more vibrant the Indian Government
allowed national online futures
trading in commodities during 2003.
The objective was to ensure stabilization
of prices of agricultural products and
provide farmers with alternative markets
that could equip them in taking the right
decisions in sowing, harvesting, and selling
of the right crop at the right market
value at the right time. Emergence of
futures trading in this context, following
the Government’s initiative, which serves
the above needs is of great significance
as a remedy to the ills in the existing
marketing system.
The Advent Of Futures Trading
Introduction of national online commodity
derivatives trading would remain
the most significant development in the
history of Indian commodity markets as
the earlier exchanges remained regional
Existence of the three national exchanges had brought in
revolutionary changes in the Indian commodity markets
by bringing in spatial integration and temporal price discovery
for commodities at the national level.
both in terms of their participation and
products. Currently, there are three national
exchanges, and twenty two regional
exchanges that are operating in the
country. Existence of the three national
exchanges had brought in revolutionary
changes in the Indian commodity markets
by bringing in spatial integration
and temporal price discovery for commodities
at the national level.
Undoubtedly, the revival of commodity
futures trading in India has led to a
reduction in daily price volatility of various
commodities in the domestic spot
markets. Table - I provides a comparative
account of price volatility of three
select agri-commodities in the spot markets
before and after the introduction of
futures trading at the Multi Commodity
THE INDIA ECONOMY REVIEW
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