The futures market is a powerful tool for breaking the market power of these families. Futures trading — taking place on a transparent, electronic exchange with nationwide access — brings in a host of new players. Indeed, there are hundreds of people in India who are watching world markets, processing information, and putting trades onto overseas commodity futures markets. Physical proximity to the market becomes a non-issue once an electronic exchange is in operation. Someone in Orissa can be trading guar seed, even though he may have never been to Bikaner which is the traditional trading centre for guar.

These new market participants engage in buying and selling; the futures market becomes liquid and the traditional families are less able to control the prices at which farmers sell. Further, futures prices tend to be highly visible at thousands of locations all across India. This information exerts a subtle influence on the power structure in transactions where a farmer sells to a trader. When both the trader and the farmer know the futures price, it is harder for the farmer to get cheated.

Particularly with participation by banks and other sophisticated financial participants, the control that a few families exert on prices is often substantially diminished. The spot market and the futures market, operating in unison, become more like a genuine market where supply and demand by a large number of participants makes the price. But as with all economic reforms, liberalisation involves removing restrictions, getting the government out of the role of banning transactions, and opening up market participation to a wide class of heterogeneous participants. It is not surprising that this is inimical to the interests of families which were earning easy profits in the previous regime and they resist change and want to go back to the ‘good old days’.

... contd.