Wednesday, December 7, 2011

“Options” option for Farmers?

India is an agrarian economy and more than 15% of our GDP is driven by agriculture. Farmers across the country are the spine of this sector and therefore for the maximum welfare for this community government usually comes out with new strategies/plans to appease them. And in this sycophancy whatever plans or policies are framed, the real beneficiaries are the deprived lot because of the leakages in the system and corruption across the entire process.
On the same lines of coming out with new strategies for the upliftment of farmers, a year ago an amendment bill was introduced in Lok Sabha and is examined by the Standing Committee for Department of Consumer Affairs for the introduction of ‘option’ trading in commodities, in addition to futures.
‘Options in goods’ as a method of commodity trading was banned sometime in mid 1960s because  that time uncertainty in the output, demand supply mismatch and high level of food inflation was prominent and ironically the same situation even prevails today. But the government is ardently supporting to induce ‘Option in goods’ because it would provide farmers with risk management tool which would be more suitable than ‘futures’ as they are not required to monitor the futures prices on a daily basis till the contract is settled.
Government belief could turnout to be fallacious as 80 percent of Indian peasantry constitute of small and marginal farmers who does not trade on futures on a daily basis. But one question which comes to fore when we talk about farmers and agriculture is “What exactly a farmer wants to produce to his/her full capacity?” and for sure the answer is a big NO to a risk management tool with which they can play. The answer to the above question is the infrastructure to protect their product from the climate uncertainties, the input availabilities in abundance and getting the right amount for their produce. These requirements are the very basic things to be corrected first before consolidating more systems on the weak fundamentals.
 ‘Options in goods’ type of risk management tool already prevail in the system as Minimum Support Price (MSP) which deals with providing guaranteed financial support when a farmer faces adversities. It safeguards the farmers’ interest with minimum financial requirement which he/she should get for his/her produce. This acts the same way as an Option would do when in place. So why the government wants to add another layer of guarantee over an existing layer? Why not the government should focus on consolidating the existing MSP system? Why not the government focus more on eradicating the supply chain leakages and making the system more transparent?
I personally feel that addition of ‘Option in goods’ would definitely incur some crore of rupees to make it completely functional, so it’s better to use that monetary resource on consolidating the existing structure rather than creating again a new cycle from the scratch. On the farmer’s point of view they want the correct price for their produce in the market which can only be possible if the right quantity reaches the correct place and for that ‘Options’ are not needed certainly.

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