Challenges Faced by Indian Commodity Markets

Commodity exchanges in Indian are still at a nascent stage, and there are numerous bottlenecks in the growth of the commodity futures market. The challenges facing the Indian Commodity markets are very serious in nature and cannot be ignored as they can paralyze the agricultural futures markets, much against the objective of agricultural liberalization. The main problem is that the commodity markets are under the control of Government.

Towards the growth of any market, the trading conditions or the terms and conditions of contracts play a crucial role. The contracts should be market friendly in terms of attracting both the big and small traders alike. In majority of the contract specifications, it was found that the size is too big for small traders and producers to trade. Unless such finer aspects are dealt with proper attention at the regulatory level and the exchange level, attracting small traders and farmers into commodity futures trading becomes impossible. Especially in a country like India, where corporate farming is absent and predominant section of the farmers own small agricultural lands, meeting the specifications of the contract becomes difficult. Such farmers prefer spot markets rather than commodity markets for trading. Even the small traders refrain from trading owing to the capital constraints.

Another key component required for the development of commodities market in India is the infrastructure. Though there are number of exchanges in India, they lack in infrastructure exception to a few large exchanges like National Commodity Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Infrastructure requirements like warehousing facilities, clearing house and modern trading ring are absent in majority of the exchanges. As a result, majority of the exchanges have to depend on a few commodities and consequently, the turnover is low.

Warehousing facilities is one major impediment to the growth of commodity markets in India. Though Government organization, Food Corporation of India, plays a vital role in storage of commodities, the infrastructure does not support future trading adequately. For the commodity futures to work effectively, the seller must deposit the deposit the commodity traded in a warehouse and the buyer should take physical delivery of the commodity in a warehouse at a location of his choice. However, at present, only a few warehouses can handle such kind of delivery requests and that too for specific commodities. Because of lack of adequate warehousing facilities that can ensure the quality standards of the commodities traded, traders and farmers still prefer local rural markets for trading the commodities. This factor is hindering the emergence of nation-wide commodity market in India.

Another major challenge to the growth of the commodity markets is the number of exchanges itself. Among the 27 commodity exchanges operating in India, majority of the exchanges are specialized in trading a few commodities. While geographical spreading of the exchanges is important for the development of nation-wide commodity market, there is no real integration among the existing exchanges. And most of these exchanges except NCDEX and MCX still practice outcry system of trading, it is cumbersome to trade in these specialized exchanges.

As a result of these small exchanges spreading across the nation and specializing in select few commodities, the turnover, volume of trade and the revenues of exchanges are all low. It is very difficult for the exchanges to sustain the momentum and provide value added services to the market functionaries with such low revenues. In order to overcome the problem of multiple commodity exchanges, many economists have suggested the integration of the exchanges and consolidation and then in the later stage opt for demutualization of exchanges similar to the Chicago Mercantile Exchange and International Petroleum Exchange. The integration of exchanges and clearing house can also solve the problem of warehouses to a significant extent. Currently, a few large exchanges like NCDEX and MCX are attracting bulk of the trading and traders because of their technology and national-wide trading terminals. As a result, those exchanges have succeeded to gain the required financial strength.


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