18.2 History of commodity market in India
The Indian experience in commodity futures market dates back to thousands of years. References to such markets in India appear in Kautilya's 'Arthashastra'.The words, "Teji" and "Mandi" have been commonly heard in Indian markets for centuries. The first organized futures market was however established in 1875 under the aegis of the Bombay Cotton Trade Association to trade in cotton contracts. Derivatives trading were then extended to oilseeds, jute and foodgrains. The derivatives trading in India however did not have uninterrupted legal approval. By the Second World War, i.e., between 1920s & 1940s, futures trading in organized form had commenced in a number of commodities, such as cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious metals like gold and silver.
During the Second World War, futures trading was prohibited under Defense of India Rules. After Independence, the subject of futures trading was placed in the Union list, and Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities, particularly cotton, oilseeds and bullion, was at its peak during this period. However, following the scarcity in various commodities, futures trading in most commodities were prohibited in mid-sixties. Deregulation and liberalization following the forex crisis in early 1990s also triggered policy changes leading to reintroduction of futures trading in commodities in India. The growing realization of imminent globalization under the WTO regime and non-sustainability of the Government support to commodity sector led the Government to explore the alternative of market-based mechanism, viz., futures markets, to protect the commodity sector from price volatility.
In April 1999, the Government took a landmark decision to remove all the commodities from the restrictive list. Foodgrains, pulses and bullion were not exceptions. The long spell of prohibition had stunted growth and modernization of the surviving traditional commodity exchanges. Therefore, along with liberalization of commodity futures, the Government initiated steps to cajole and incentivize the existing exchanges to modernize their systems and structures.