History of the Commodity Market in India

The commodity market in India has gone through a fascinating evolutionary journey over a long period. You’ll be amazed to know that the history of commodity market has its roots dating back to the 19th century! The setting up of the Bombay Cotton Trade Association in 1875 was the watershed moment for organized commodity trading, and it’s never looked back ever since.

Even more interestingly, the market was hugely active from the ancient era with the barter system, and other innovative policies that spread throughout the Mughal and colonial times. However, the real transformation came with liberalization that could shrug off post-independence challenges successfully.

Since then, several technological and regulatory changes have also shaped this segment. Sounds interesting? Let’s take a closer look at the same below. 

Commodity Trading in Ancient & Medieval Times

The history of commodity market in India cannot be understood without starting from the very roots of the same. Commodities played a significant role in the ancient Indian economy, including major goods like textiles, spices, gems, gold, silver, grains, and more. Trade was enabled not just in India but also globally through various sea and land routes, including the trading network across the Indian Ocean and also the Silk Road.

The Pre-600 CE era saw turmeric, pepper, ginger, silk, cotton, gems, and metals traded, along with agricultural products. 

Some of the major ancient Indian trade centers included Taxila, Mathura, Pataliputra, Puhar, and Ujjain, to name a few. The Indus Valley Civilization also reportedly traded with Egypt, Mesopotamia and many other regions, dealing in textiles, pottery, agricultural products, metals, etc.

The Gupta and Mauryan Empires established prosperous economies with several trade routes and markets, enabled by standardized coinage and weights. The Deccan route, or Dakshinapath, also traded in various items like diamonds, pearls, precious stones, and gold. 

The barter system was a major commodity trading enabler, helping people exchange goods and services. They were directly exchanged without using money or any other medium. Livestock or crops were often traded for pottery, metal tools, textiles, etc. Both parties would work out the relative worth of their goods and offer them in exchange.  

Mughal & Pre-Colonial Markets 

The history and evolution of commodity market in India are intrinsically tied to the developments in the Mughal era and the pre-colonial period at large. Trade expanded hugely in the commodity market during the Mughal rule, with more organized market systems. Major exports included textiles like cotton and silk, cloves, cardamom, and pepper, agricultural products like opium and indigo, stones, precious metals, etc. Imports included raw silk, horses, and many other luxury goods. 

Multiple trade routes were set up and expanded, linking to key commercial centers like Surat, Ahmedabad, Calicut, Agra, Bengal, and Masulipatnam. There were coins circulated for trading, including silver rupees, gold mohurs, and copper dam, while coinage was also swapped for hundis which functioned like negotiable bills of exchange. Cowries from the Maldives were also used as currency in some locations during this period.

Emperor Akbar’s Zabt land revenue system was based on a tax mechanism that encouraged the cultivation of indigo, cotton, and sugarcane, thereby providing a boost to commodity trading.

European companies from Britain, Holland, Portugal, and France also set up trading posts in the country. The British East India Company started with textiles but expanded to include many other goods as well. 

The standardized weights and measures system enabled fair trade practices, while moderate tariffs for goods made commodity trading more profitable. Caravanserais, better roads, and protection for trade routes also led to a thriving market, drawing traders from Europe and the Middle East.

Mughal markets or bazaars became the hubs for commodity trading, with many specializing in particular products like spices or textiles, enabling better quality maintenance. 

How British Policies Made An Impact

Another milestone in the history of commodity market came with colonial rule. British rule led to several policies that transformed commodity trading in India into a more diverse economy and also a major supplier of raw materials for British goods (and a market for them too). The Charter Act of 1813 enabled free trade for British citizens, while there was more focus on producing materials like indigo, jute, opium, and cotton for British industries.

The first organized commodity trading center was set up in 1875, namely the Bombay Cotton Trade Association, laying the foundation for futures trading in the country. Derivatives were also developed for several commodities, while the Bombay Cotton Exchanged Ltd was set up in 1893 by several merchants and mill owners. 

The futures markets were later established in jute products, raw jute, edible oilseeds, bullion, etc. The Gujarati Vyapari Mandal was also set up in 1900 for futures trading in castor seed, cotton, and groundnut, while the Calcutta Hessian Exchange was set up in 1919 to trade in jute products and raw jute. Bombay saw futures trading in silver and gold, and later it spread to Jaipur and Kanpur among other areas. 

The Bombay Commodity Exchange was established and registered in 1938 for oil seed complex trading. Another development was the Chamber of Commerce at Hapur, set up in 1913. 

Calcutta, Bombay, and Madras became Presidencies of British India, transforming into key trading centers for goods like opium, indigo dye, cotton, tea, silk, and more. 

Post-Independence Regulations & Growth

The early years of independent India saw multiple challenges in the commodity trading space. The Government/regulator-imposed ban post-independence saw de-growth in the commodity futures market.

The major contracts in the post-independence years were majorly based on turmeric, pepper, and exotic spices. Yet, from the 1980s, things started changing gradually, with several advisory committees being set up. The FMC (Forward Markets Commission) was established in 1952 for regulating and promoting the commodity market. It was a major step towards enabling fairer market practices and to safeguard the interests of all participants. 

Statutory boards were established, namely the Tea Board (1954), Rubber Board (1947), Coffee Board (1942), Tobacco Board (1976), and Spices Board (1987) under the Department of Commerce, Ministry of Commerce & Industry. These boards promoted exports of specific commodities through multiple initiatives and schemes.

Another landmark was the Essential Commodities Act (1955) which was set up to ensure the delivery of specific products/commodities, the supply of which, in case of obstruction owing to black marketing or hoarding, would impact regular life of citizens. It included foodstuff, petroleum products, drugs, etc. The Government could also fix the MSP (minimum support price) of any essential commodity. 

Liberalization & How Markets Revived 

Economic liberalization completely changed the history of commodity market and positively shored up the Indian economy. It opened up foreign trade and investments, leading to modernization, globalization, and also aimed at lowering Government control on businesses. It led to a major surge in exports and growth in GDP, while bringing in more competition for Indian businesses. 

Another aspect of modernization was the establishment of several major commodity exchanges. The MCX (Multi Commodity Exchange of India) was set up in 2003 in Mumbai and is the biggest countrywide commodity exchange. It offers trading (via options and futures) in gold, silver, natural gas, crude oil, pulses, spices, agricultural products, etc.

The NCDEX (National Commodity and Derivative Exchange) was founded in 2003 and enables the exchange of several commodities like oilseeds, spices, wheat, and rice.

NMCE (National Multi Commodity Exchange) was founded in 2002 and specializes in both non-agricultural and agricultural commodities, while the ICEX (Indian Commodity Exchange) was set up in 2009, focusing on diamond derivatives. 

Other exchanges included the ACE Derivatives & Commodity Exchange (2010) which offers trading in several agricultural and non-agricultural goods and the Universal Commodity Exchange (2012) which offers trading in metal, energy, agricultural products, and more. 

Advancements in Modern Times 

The merger in 2015 of the FMC (Forward Markets Commission) with SEBI (Securities and Exchange Board of India) made the latter the unified and key regulatory body for both commodity and security markets in the country.

SEBI now regulates the commodity derivatives market, enabling the adherence of all participants to stringent regulatory guidelines. These cover risk management protocols, fair trading, investor protection, and transparent operations in the market.

It has also streamlined market trading processes, while creating a separate Commodity Derivatives Market Regulation Department and divisions for surveillance, intermediary registration, enforcement, investigation, research, etc. The merger has also enabled higher confidence of investors along with more participation in the market. 

Future & Growing Trends 

The commodity market in the country is on the verge of a brighter future, with blockchain and other fintech innovations coming into play. Blockchain will enable easier reconciliation and secure documentation of trades through encrypted digital ledgers.

Digital processes will naturally lower paper trails and trading costs considerably, while enabling higher transparency and better supply chain management. Fintech services will enable higher access to analytics and insights along with several other services that will level the playing field even further. Future opportunities will keep arising with more regulatory reforms, higher investor awareness and knowledge, and more advanced technological integration. 

One of the challenges is expected to be higher market volatility, since prices of commodities are vulnerable to massive fluctuations due to several aspects. These may include supply chain disruption, geopolitical tension, demand changes, natural disasters, and more. 

Conclusion

Now that you have a better picture of the rich history of commodity market and trading in India, it will be a good idea to explore investment choices in this category (futures and options). Do your research on available commodity trading options, gain market knowledge, and get professional help en route towards starting your investment journey.