Can futures trade be an effective alternative to MSP?

In the recent round of negotiations at the World Trade Organisation (WTO) for Trade Facilitation Agreement, the stand of Indian Government for supporting its food security programme has been highly criticised. The US complains that the Government is administering prices of foodgrain for procurement at a much higher price than the market price. However, the Government is of the view that the administered price of foodgrain is projected high due to the calculation methodology adopted by the US.

If a country signs TFA, it has to limit its food subsidy to the extent of less than 10 per cent of total agricultural output. In case of breach of the limit by any country, other participants of TFA can challenge such action and they can also go on to levy trade sanctions against the defaulting country. Though different opinions have been floated by different countries on India’s stand on its core issue of food security, the country should also look forward to find some alternatives to tackle this issue.

With the US Government turning critical, one thing is clear: the basic issue raised by the US is the administered price system followed by Indian Government. The rationale behind following the MSP system is not just to support the farmers but also to maintain buffer stock of foodgrain. Though the stand taken by the Government against the TFA may be justified, but exploring opportunities for alternative measures should be undertaken. While administering the MSP, the Government is bound to maintain a mammoth storage infrastructure through the Food Corporation of India. The maintenance cost of the FCI is also one among the major expenses Government incurs for food subsidy programme.

According to the FCI’s annual report, the corporation is incurring huge expenses in the form of costs in carrying the buffer stock (₹8,421.5 crore), freight expenses (₹7,072 crore), interest expenses (₹6,392 crore), handling expenses (₹3,334 crore), personnel expenses (₹2,192 crore) and other non-purchase expenses (₹2,153 crore). Apart from this, during the same financial year, expenses in the form of storage loss and transit loss amounted to ₹845 crore.

Futures trading on commodity exchange platform is gaining momentum in the India. Recently, it was observed that even farmers from Rajasthan are trading on the commodity exchanges platform. Now, if the entire system of procurement is being done through the system of Futures trading (or even through Option Trading) on the commodity exchange platform, the Government could get benefits of scheduled procurement directly from the delivery points of these exchanges, which, in turn, will help overcome the burden of maintaining FCI for stocking and delivering foodgrains. This will also help in minimising the wastages of foodgrain as exchange approved warehouses are bound to maintain quality of the commodity traded in the futures market. Since the procurement by the Government will be for the same quantity as procured without futures trading, the demand and supply situation will be balanced and prices paid to farmers will remain either same or even may increase as the number of participants and the volume of trade of commodity derivatives on exchange platform will be higher than the spot. Since the utilisation of storage houses are essential for participating in trade at commodity exchange, the concept of pledge finance and utilisation of Negotiable Warehouse Receipt may easily be popularised. In this way government will not only assure a remunerative price as well as liquidity to farmers but also may not face the criticism of administered price in the form of MSP.

In order to extend the facility of future trading, there will be requirement of three major components:

Commodity Exchanges: at present there are three national and 19 regional commodity exchanges and for bringing such a large volume of trade, facilities of existing commodity exchanges may be utilised as well as new specialised commodity exchanges may be promoted.

Awareness : Currently, the Forward Market Commission, in coordination with institutes such as National Institute of Agricultural Marketing, Jaipur, is organising several awareness programmes for farmers to facilitate them in participating on commodity exchanges. These programmes have to be organised on a war footing. Also, capacity building programme in futures trading for officers of APMC and other officers of similar institutions are regularly organised. APMC may have to play the role of assayers/brokers of commodity exchanges to extend the facility of commodity future trading at a large-scale.

Quality warehouses: While trading in commodity derivatives, the underlying assets are perishable and thus require effective management of warehouses with quality infrastructure. At present the Warehousing Development Regulatory Authority (WDRA) is promoting accreditation of warehouses. The norms of accreditation are so stringent that if followed, the quality of commodities will be maintained to a satisfactory level. Being a central authority, based in Delhi, WDRA is yet to give pace to the work of accreditation which it might need to give while promoting a large number of quality warehouses. There will be a need to introduce regional chapters of WDRA to promote quality warehouses in the country. The existing infrastructure with FCI can also be brought under PPP mode which will not only provide a huge storage infrastructure to facilitate future trading at commodity exchange but may also turn into revenue source for Government.

The writers are associated with National Institute of Agricultural Marketing, Jaipur. Views are personal.