India, perhaps, was once the world's highest futures trading market till early 60s when commodities from the least consumed lentils (like moong) to the most valued commodity -- bullion-- were actively traded. Even the smallest trader participated in futures from a small shanty shack in remote India.

While the securities market in the country was almost non-existent, the commodities market was a booming one until the government labelled it speculators' paradise and banned it. The ban has relegated the country way down on the list of futures trading. The reintroduction of commodity derivatives now appear to be more difficult despite the government now moving towards including more commodities on the list. At present, the government has permitted forward trading in nine commodities, of which cotton and jute has been permitted to be traded only within the country, while castor oil can be traded on brokerages across the globe. Forward trading, however, is active in six commodities, viz turmeric, castor seed, potatoes, pepper, hessian and jaggery.

The total production of these six commodities is just 1.2 percent of the gross domestic product (GDP). Out of this, 50 per cent is accounted by potatoes, leaving only 0.7 percent of total GDP of the balance five commodities.

The prospects of derivative trading in these commodities is unlikely in the near future, primarily because of the low volume forward market, the financial conditions of exchanges and lack of proper infrastructure.

Moreover, the existing participants needs to upgrade trading practices to be on line with other developed exchanges worldwide. Currently, the forward trading market lacks professionalism and follow old practices. The trading pattern needs upgradation like the other exchanges viz equities and bonds. Further more there is a lack of depth in the market, for example, position taking is at the minimum, thereby, leaving less room for speculation.

For an active futures market it is necessary that more and big players come to the fore.The membership at the exchanges should be broadbased and not restricted to only traders. More players like growers, consumers, processors, exporters and the like need to be participants to introduce some depth in the market.

Trading volumes in the permitted commodities currently is very low to attract futures trading by even domestic standard and therefore, setting up of national commodities derivatives exchange at this stage would be too premature. The underlying cash or ready market is almost non-existent in this context.

The volume of trading needs expansion not only in terms of volume and value but also as percentage of production of the commodity. Till the desired level is acquired the idea of multi-commodity exchanges have more chances to be successful. Trading in various commodities at a single exchange will provide more depth and liquidity to the market, making it financially better off.

(To be concluded)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.