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The special art of failing conflicting parties

It takes a genius of a special kind to end up displeasing two sides with conflicting demands. But our government is a genius. How else would you explain the fact that in trying to balance between the interests of consumers – to have food at minimal prices and farmers - who naturally would prefer higher rates for their produce, the government has ended up hurting both. With a higher rate of inflation witnessed in recent months, fuelled primarily by exorbitant rise in food items, it is quite strange that the ultimate beneficiaries of this rise are not farmers. Quite the contrary - our farmers are committing suicides. The rot obviously is somewhere “in between”. I needed to understand this strange paradox prevailing in India.

As I was mulled over these issues I ran into Joshi, the farm economist at the morning walk. “Narada, the derivatives market for agriculture products is the cause.” Joshi was as usual delightfully vague. What has derivative trade in agriculture got to do with the current crisis especially farmers’ suicides in our farm sector, I wondered aloud. “Wheat prices have shown over 15% increase from their end 2004 prices and pulses a 100% increase over their 2004 prices in the futures market. This price is post harvest and does not benefit farmers but hurts consumers.” It looked encrypted and deciphering the same was going to be torturous.

My looks were a dead give away. Joshi sympathised with me and went on to explain. “Derivatives in farm products is in effect legalising gambling. With over 97% of the total trades speculative, this is something that India can ill-afford.” “Could you explain in simpler terms?” I said in a demanding tone, little realising that I was at the receiving end of the conversation. “Narada let me explain the matrix. Agriculture in India is a risky business. And derivatives are meant to help farmers mitigate their risks. But please note that these are complex financial instruments handled by extraordinary specialists not farmers. The net result is a complete disconnect between these markets and farmers. Thus derivative markets have been unable to eliminate the concomitant risks of farmers.” “But can you join the dots and give me the full picture,” I requested. “By raising the price in the future markets you psychologically tutor the markets for a price increase and create a facade of demand exceeding supply. And don’t underestimate the power of psychology in economics. The net result is that anybody who controls the derivatives markets controls the foodgrains prices. In effect the present arrangement is neither benefiting the consumers or farmers.” Joshi was right. After all foodgrains production for the past many years has been hovering at about 205 MT. We import pulses and oilseeds as we did in the previous years. Yet inflation is not under control. The needle of suspicion is on derivatives markets. Instead of addressing the risks of our farmers, derivative markets have become a haven for speculation and consequent manipulation in the spot markets. “What’s the solution Joshi?” I enquired in an annoyed tone. “We need to ensure that our farmers benefit from these instruments and not allow manipulation of the spot markets through the futures markets. For this reason participation of farmers in good numbers is crucial. Secondly, we need to have innovative instruments that benefit the farmers like for instance weather derivatives to hedge monsoon risks and not merely product derivatives,” Joshi said and went on to add “our assumption that farm products are homogeneous and farm markets as perfectly competitive has been proved wrong. I am not for one suggesting that we do away with the derivative markets for agri products. Nevertheless a re-think to suit Indian conditions could help.” By this time we had completed our morning walk and reached the Gandhi statue. I bid bye to Joshi and stood in a serious state of contemplation below the statue. Are derivative markets benefiting our farmers and consumers? Is Joshi’s prescription worser than the disease? If farmers are converted into traders should traders be converted into farmers to maintain balance? Would the Mahatma approve of the present arrangement or at-least Joshi’s suggestion? Any takers?

Last modified on Sunday, 07 July 2013 07:36