Indian Commodity Markets – Then And Now

In our first article of the commodity series, we began with a focus on the evolution of the global commodity markets. We saw that the commodity markets world over have reached a standardised trading mechanism, and also that it is ever-evolving in nature. This time, let us take a step towards understanding the Indian commodity markets. We begin with a snapshot on the strength that the Indian economy showcases in the commodities space.

The fact that India is among the largest in world farm output itself shows the strong base of the country in this very crucial segment. Commodities, whether agricultural or non-agricultural, play a crucial role across the world. With India’s dominance in the agricultural space, the day is not far away that the country becomes a price-setter for major agricultural and non-agricultural commodities.

To start with farm commodities, it is important to note that agriculture and the allied sectors contribute an average of 14-15 per cent to India’s GDP. The share of agriculture in the GDP has seen a decline from the earlier share of 25 per cent; we have seen in the past few years that this has largely stabilised around 15 per cent as this is demographically the broadest economic sector and plays a very important role in India. The fall in share of agriculture in the GDP can be attributed to phenomenal economic growth in industrial sectors in the past few years.

The rural population in India, which drives the agricultural sector, accounts for a whopping 68 per cent of the rural-urban population divide. Hence, from this point of view, agriculture still retains key importance in the Indian economic context. India is amongst the world’s top largest producers of commodities like cotton, wheat, sugarcane, rice and pulses. Of course, it is also one of the major consuming nations for these commodities.

The country also features among the top consuming nations of non-agricultural produce like precious metals, base metals and energy-related commodities such as crude oil and natural gas. In world trade, most major farm commodities are exported, but in the case of metals and energy, India lacks production capabilities to meet the demand. Thus, the country is a major importer of commodities like crude oil, copper and steel, etc. Gold has also become a major component of Indian imports as along with traditional demand, Indians are now focusing on gold even from the investment point of view. Due to negligible production of gold in India, the country has seen a sharp increase in imports over the years. Overall, the nation has a major presence in the global commodities market, as it is not only a top producer and consumer but has also become a renowned commodities marketplace.

In the last decade, however, the Indian commodity markets have undergone a shift as the earlier platforms created a lacuna due to the localised nature of the market. This restricted the scope of price discovery just to the local market, thus ignoring the developments at the national and global levels. Traditionally, mandis that performed as wholesale physical markets were established under the jurisdiction of state governments that provided local platforms for trading in agricultural commodities. Mandis were established and regulated under the states’ respective APMC (Agriculture Produce Market Committee) Act.

The main concern with the mandis or the physical markets was that they lacked the price dissemination structure, due to which farmers fell prey to cartelised trading and received incomplete and local level price information. Also, a major aspect that needed immediate correction and deviation was the intervention of multiple intermediaries, local levies and poor post harvest storage facilities, which led to a huge gap between farm and retail prices. 

A quick backdrop of the deep-rooted Indian physical commodities market showcases how and why India stepped into commodity futures, and how they have helped to transform the face of commodities trade in the country. To solve these issues, a proactive step by the Indian government was taken a decade ago by launching national-level electronic, real-time futures commodity exchanges. Futures trading in commodities, both agri- and non-agri, was introduced in order to bring forth a transparent and efficient pricing mechanism. A commodities market intermediary today can effectively make use of these exchanges to manage price risk and quote prices of the respective commodities.

These commodity futures exchanges have the capability to overcome the limitations in the physical marketplace to a great extent. The opening up of the commodity futures market has been a revolution for India, taking place nearly after four decades of being dormant on account of restrictive government policies. Thus, the year 2003 marked a turning point that began the escalation of commodities trading in India. Today, there are six national level exchanges and 16 regional exchanges in India that conduct robust trading in the whole set of commodities. Major commodities traded at the national level exchanges can be referred to in the table annexed herewith.

Having seen the evolution in the Indian commodity markets, we feel that there is still further scope for growth. A host of challenges need to be addressed and looked upon. But despite that, the current dynamics of the Indian commodities market are close to the global standards and offer great opportunities for all market players in the years to come.

India’s Major Commodity Exchanges

(Naveen Mathur is Associate Director of the Commodities and Currencies businesses at Angel Broking. With a rich industry experience of about 19 years in financial markets, he has been associated with commodities trading right from 2003, the year when two online commodities exchanges started trading activities.)

(The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Dalal Street Investment Journal.)