Manage Risk, Or Perish

New tools to manage volatility in commodities have become both cheaper and effective

THE latest update of the IMF’s World Economic Outlook projects the Indian economic engine to chug ahead on full steam in the near term, growing by a phenomenal 7.5 percent and 7.7 percent over 2019 and 2020 respectively. In fact, India stands out among all major economies with the highest projected growth rates. Moreover, IMF and other India-watchers believe that India’s gravity-defying growth rates do not seem to be a flash in the pan, but is likely to be sustained over a considerable period.

Supporting the growth story is the strong momentum being seen in mining, manufacturing, and related sectors. Aided by rising aggregate demand of a rising population (much of which is young), and an enabling policy environment, the secondary sector has been growing fast and shall continue to retain its momentum. Gross Fixed Capital Formation, which represents investments in fixed assets has increased by 10.44 percent between FY16 and FY18. Besides, during the first six months of the current financial year (April–September 2018), Gross Value Added from manufacturing grew 14.8 percent year-on-year at current prices to touch about Rs 139 trillion.

Within the secondary sector, several industries have been able to grow and attract investments drawing on commodities. In fact, the role of an assured supply of commodities at stable prices has been very significant in the growth trajectory of any economy in its development phase, which is reflected in India now. The sector-wise composition of FDI flow in India in the last 18 years clearly shows that high levels of investments (and by extension, resultant value addition) have flown into industries which are structurally very commodity intensive.