Rubbishing the sustained opposition of the commodity futures market in the country by several political parties, significantly the left Front partners, who blame this segment for fuelling overall inflation and destabilising commodity markets and call for its ban, a study on the economic impact of this mechanism in India has termed this premise as ‘tenuous’ and on the contrary praised the system for stabilising prices.
Consulting firm Deloitte, which has prepared the report, has further pointed out that inflation in agricultural commodities is mainly caused by increasing population, higher purchasing power of this fuelling population, logistical constraints and market imperfections.
On whether futures trading causes inflationary pressures on the spot prices of agricultural commodities, the report has said through its analysis that “the premise that volatility in spot prices of commodities is attributable to the commodity futures markets is at best tenuous, while in fact, it would appear that commodity futures market have a role in price stabilisation”.
The report titled, “Study on Economic Impact of Commodity Futures Market in India” rather praised commodity futures market for directly generating employment opportunities for around 15 lakh persons across the country.
“If we compare the employment generated by commodity futures exchanges and its direct linkages, we observe that this constitutes about 0.93 per cent of the service sector labour force in India,” it said.
Describing commodity futures as advantageous, the report said that aggregation of trading activity on a single platform, increase in the number of transactions and liquidity causes reduction in the transaction cost.
“In the light of the same, commodity exchanges which bring about aggregation of trading activity on a single platform, increase in the number of transactions and liquidity in the market place, lead to reduced transaction cost for participants taking exposures on these trading platforms,” it said.
Further commending commodity futures market, Deloitte observed that their exchange platforms have not only encouraged participation of the marginalised segment of the rural populace into the organised commodity markets, but have also brought to their doorsteps, services from the mainstream financial sector.
“This initiative by the commodity derivative exchanges have promoted financial inclusion at the grassroots level, thereby ensuring that the marginalised segment of rural India is aligned to the common economic objectives of an all-inclusive growth by overcoming the spatial constraints of localised market systems,” it noted.
The report has also called for participation of banks, fund houses and other financial institutions in the Indian commodity derivatives market, as this would help in an all inclusive development of both the spot and derivatives market.
“Commodity derivatives provide an excellent platform for hedging exposures to the commodity prices arising due to agri-sector lending by banks and other financial institutions. Further, incorporation of commodity structured risk management solutions along side credit, savings and insurance services within the microfinance toolkit have been found to immensely benefit small-holders,” the Deloitte study explained.