There are around 30,000 spot physical markets, of which 15% function under the ambit of regulation. There is a large number of markets which are not regulated under marketing laws. The unregulated markets are in the hands of commission agents. The Indian commodity physical market is currently facing three major challenges -- production, transparency and regulatory blind spots.
In spite of overflowing government warehouses, yields have not improved substantially over the years. While the government may be declaring bumper production year after year, feeding the Indian population will be an enormous challenge in time to come. India does not grow sufficient quantites of pulses and oilseeds. The production challenge is likely to force India to be a large global importer in the next few years. We all may have to agree that we do not produce enough for our population. In terms of energy consumption, we have entered an era of high prices which is likely to cause transport cost escalation in the first mile of commodity movement (farm to market yard). The average reach of a single regulated market is 459 square km. Obviously, this cannot be covered in bullock carts. The central and state governments are in the process of creating more regulated markets so that the command area of each market does not extend beyond 80 square km.
Secondly, the most important gap in transparency in the physical market for agricultural commodities concerns information on stocks. What level of stocks do we really have in foodgrain? Official figures are unlikely to match available physical stocks and no government or any official can jeopardise the truth to come out. Very few countries in the world are capable of providing information on stocks (both government and private stock). Till a few years back, commodity traders’ interpretation of “good” and “bad” production and “high” and “low” demand used to influence prices in the local market. However, in recent times, with the growth of communication, there has been an institutionalised attempt by several trade bodies to influence the production and demand data to cause distortions in price outlook. Lack of transparency in global physical agricultural markets is also adding to price swings.
Lastly, spot physical markets continue to suffer from regulatory blind spots. Regulation does not mean controls, neither protectionism, nor does it mean administrative price-fixing. However, it is important to strengthen the oversight. Lack of credit flow to agricultural sector in India has always been cited as the biggest impediment. However, in recent times the physical market is being looked increasingly for investment opportunities by a large number of interest groups. In the absence of any commodity index funds in India, financial players are increasingly entering the physical markets by opening their own trading desks. How does one ensure prevention of “financialisation” of the physical markets? Abundant liquidity due to an expansionary monetary policy and low returns on other assets is one reason which is often given for an increased investment in physical commodities.
Price volatility in commodity markets is a function of liquidity available in the local market. When crores of rupees are put to work in small markets like agricultural spot commodities, it inevitably increases volatility and amplifies prices. When the enthusiasm of financial markets meets the reality of the relatively slow-growing real economy, an adjustment of exaggerated expectations of actors in financial markets becomes inevitable. The current spot market regulations have limitations and are not geared to regulate financial flows in large scale. In absence of regulation on financial flows in physical market, one needs to find a middle path -- one which may not lead to the law of the jungle (in the absence of regulations) or a paralysis of operations (with too many rules).
In times to come, the ability of the physical market to provide food security, access at affordable price would depend largely on the policy response to production, transparency and regulation of the spot markets.
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