CHANGING PATTERNS OF AGRICULTURAL-DERIVATIVES IN INDIA

- Post liberalization scenario

* Dr. G. Kalyani, HOD,Dept. of Business Management,

Sree Chaitanya College of Engineering, Karimnagar,AP, INDIA.

+91 9490004582, kalyanigundlapudi@yahoo.com

** G. Bhanu Chander,Assistant Professor,

Dept. of Business Management,Sree Chaitanya College of Engineering, Karimnagar,

AP, INDIA.+91 9533550239, bhanu.chandu@gmail.com

ABSTRACT:The on-going economic reforms that seem to have led to an increase in the growth rate as

well as regional inequality need appropriate change for reducing regional disparities in development in the country. Following macro economic reforms introduced in the Indian economy in the early 1990s, and the reforms in the multilateral trading order brought about in the wake of GATT negotiations and setting up of WTO, the Indian agriculture has entered in to the phase of globalization and diversification. It is expected that the combined effect of the reforms in the domestic policies and international trade reforms would result in a much larger integration of the Indian economy with the rest of the world, and such a scenario would bring about substantial benefits to the Indian farmers.

To realize the expected gains from trade liberalization, apart from improvement in infrastructure, Indian agriculture would need to become more competitive. The recent deceleration of growth in Indian agriculture- both in production as well as in crop productivity- has however been a cause of worry. Unless this trend is reversed, India may not be able to take on the opportunities that may be made available to it in the wake of globalization. Reversal of this trend would however require action on a number of fronts the most important being reversing the trend of declining public investment in agriculture and extending the coverage of irrigation to a much larger cultivated area. The post liberalization of scenario of Indian agricultural derivatives is quite encouraging requiring a few policy level modifications and infrastructural requirements at the base level. The present paper is an attempt to provide an idea on the changing aspects of agri-based commodities in India in post liberalization and post reformic era.

Keywords: Economic reforms, Growth, Regional inequality, Derivatives, Agricultural

Introduction

The commodity derivative market in India has achieved substantial development in terms

of transparency, technology and trading activities. The total value of agricultural trading has

reached to Rs 1, 42, 269 crore during 2012-2013. With the significance policy changes and

liberalization of world market, Indian Derivative market has achieved phenomenal growth in

terms of volume of trade, number of product on offer and transparency. Commodity market play

vital role in the economies like India where agricultural production constitutes a major part of

GDP. India being agricultural dominated economy is one of the top producers of agricultural

products, where farmers have to face yield risk along with price risk. Farmers need protection

against the price fluctuations of their crops. From the time of sown to the time of harvest they

face price uncertainty. With the use of simple derivative product, farmers can partially of fully

transfer price risk by locking in asset prices.

Commodity derivatives made their appearance before financial derivatives in the world

and also in India. Informal trading in commodity derivatives was there even in ancient India, but

the formal market took shape in the late nineteenth century. However, the growth path of the

Indian derivative market was not smooth. Trading remained banned for a long period of time

since 1966 and it was reintroduced in the early 2000s. The present study makes an overview of

the Indian commodity derivatives (agri) market and portrays its sustainability. The study

discusses the evolution of the market, its present status and the future prospect.

Objectives

To provide an overview on the growth prospects of Indian agricultural commodities.

To portray the impact of trade liberalization on agricultural commodities at the national

level.

To discuss the strategies for the liberalization of the trade in agricultural commodities.

Research Methodology

Secondary data has been taken from surveys, reports and articles providing a basis for the

analysis on agricultural commodities in India in post-liberalized economy.

Changes in commodity market (agri) – post liberalization

Derivative market serves two basic purposes in an economy. It provides hedging

opportunities to those who suffer from uncertainties in market prices. It applies particularly to

agricultural and primary articles for which supply depends highly on natural conditions such as

weather. The producer, in this market, can fix his product price beforehand by agreeing on a

forward contract. Buyers can also do the same to confirm the purchase price. In fact, commodity

futures evolved as a means of hedging, although latter on it was used more for speculation

purposes. In India, for instance, over 95 per cent of the trading volume in futures today

comprises speculative trades. Derivative market performs another economic function, viz., Price

Discovery. Price discovery has been defined as revealing information about future cash market

prices through the futures market. Producers and consumers take their decisions partly on the

basis of current market prices (spot prices) of the products and partly on the prices to prevail in

future. Derivatives markets hold an immense potential for the economy as they stabilize the

amplitude of price variations, facilitate lengthy, complex production decisions, bring a balance

between demand and supply, act as a price barometer to the farmers and the traders besides

encouraging competition. These markets while enabling price discovery and better price risk

management engender inter-temporal price equilibrium and horizontal and vertical price

integration. While ensuring price risk mitigation and remunerative returns, these markets also

contribute in scaling down the downside risks associated with agricultural lending and thereby

facilitate the flow of credit to agriculture. Besides, these markets through the use of warehouse

receipts obviate the need for collaterals, the lack of which has currently impeded the flow of

agricultural credit. The promotion of derivatives trading has become imperative particularly, in

the aftermath of WTO regime to face the challenges in terms of exposure to the vicissitudes of

world commodity prices and heightened competition. In the Indian context, there are very few

studies on the performance of the derivatives trading in select agricultural commodities.

Performance of Commodity Derivatives Market in India

A decadal overview of growth pattern reveals that the commodities such as turmeric,

pepper and castor seed witnessed a significant turnaround in their volumes as measured by their

compound growth rates since the late 1990s compared to the first half of the decade, while the

commodities such as gur and cotton displayed downtrend during the same period. In terms of the

value of trading, while commodities such as castor seed, and pepper witnessed a sharp rebound,

others such as cotton, gur and turmeric revealed a negative growth. There has, however, been a

massive spurt in the business of commodity derivatives trading in the recent past. The size of

volumes and value of commodities traded tripled during 2009-10. During 2012-13, the volume

of trading recorded at 7,385 lakh tonnes.

Liquidity in the Commodity Derivatives Market

Liquidity forms a key aspect of performance of commodity derivatives market. In order

to capture the extent of penetration or depth of the market, the values of trading in the

commodity derivatives market have been juxtaposed with the Gross Domestic Product (GDP)

and volumes of trading with production of those commodities. Accordingly, the total value of

commodity derivatives traded at present accounts for about 2/3rd of overall GDP, ramifying the

extent of penetration that this market has gained in the Indian economy. The total value of

commodities traded as a proportion of GDP shows a sharp turnaround in 2008-09 to around 67

per cent from over 20 per cent a year ago. Similarly, the value of trading of agricultural

commodities as a proportion GDP emanating from agriculture witnessed a three-fold increase in

2010-11, recording a ratio over 70 per cent. However, the value of trading of agricultural

commodities as a proportion overall GDP stood at around 37 per cent, followed by bullion

(around 24 per cent), oils (6 per cent) and other metals (0.6 per cent) during 2011-12.

(Source: Ministry of Consumer Affairs, Food and |Public Distribution, GOI, 2012.)

Growth in agriculture in India in pre and post liberalized scenario (selected commodities)

Indian economy has witnessed a massive growth in post liberalization scenario especially

in the context of agricultural production, consumption and most importantly the volume of trade

of agricultural commodities in the open market as well as in derivatives market operations. This

phenomenon has lead India as one of the top contributors of agri based commodities worldwide.

Government of India has conducted an “Economic Survey” in 2012-13, which portrayed a

significant pattern of change (growth) in terms of production and in terms of yield in agricultural

commodities.

PRODUCTION OF MAJOR CROPS (units in Tonnes)

Source: Directorate of Economic and Statistics, Department of Agriculture and CooperationNa: not availablea: Fourth advance estimatesb: Includes groundnut, rapeseed & mustard, sesamum, linseed, castor seed, niger seed, sunflower and soyabeenc: Bales of 170kgsd: Bales of 180kgs

YIELD PER HECTARE OF MAJOR CROPS (Kg. / hectare)

The production aspect of the commodities is viewed as the market demand in terms of

totality of all the states of India and the Yield aspect of the commodities is viewed as the return

generated from the markets aggregately.

Conclusions

Commodity derivatives have a crucial role to play in the price risk management process

especially in agriculture dominated economy. Derivatives like forwards, futures, options, swaps

etc are extensively used in many developed as well as developing countries in the world.

However, they have been utilized in a very limited scale in India. The production, supply and

distribution of many agricultural commodities are controlled by the government and only

forwards and futures trading are permitted in certain commodity items. The present study is

based on present status, growth constraints and developmental policy alternatives for derivative

markets in agricultural commodities in India. Commodity derivative trading in India after a

phase of long and turbulent historical sojourn, witnessed a massive spurt in the recent period.

The total value of commodity derivative trading accounts for about 23rd of overall GDP. It is

overviewed that commodities were found to be high only in few commodities such as castor

seed, soybean oil and to some extent cotton, while in the case of others. The markets in India are

yet to achieve minimum critical liquidity that can generate greater economies of scale minimum

transaction costs and wider participation.

References:

1. The Indian Economic Survey 212-13

2. Directorate of Economic and Statistics, Department of Agriculture and Cooperation, GOI

2012

3. Ministry of Consumer Affairs, Food and |Public Distribution, GOI, 2012

4. Profile and growth of agricultural commodity futures in India by Sendhil R , Amit Kar, Mathur V

C and Girish K Jha (socio - economic voices December, 2012 - January, 2013).

5. Twenty years of India’s liberalization: experiences and lessons by UNCTAD Centre for

WTO Studies.