Title: Indian Tea Markets: From OTC Trading to Exchange-Based Electronic Order Matching Trading System
Abstract: Domestic tea markets need an efficient and transparent trading platform for the benefit of its producers. In this context, the present paper performs cointegration analysis between domestic and international auction prices, and also among domestic auction prices, using monthly data and residual-based cointegration and error correction model. The results indicate that cointegrated domestic and international as well as domestic tea auction prices do correct short-run disequilibrium towards long-run equilibrium. Similar result holds for tea export against forward contracts and exchange rate. Further, based on these results, the paper tries to convey the importance of exchange-based electronic order matching, considering the lacuna with Over-The-Counter (OTC) derivatives trading.(ProQuest: ... denotes formulae omitted.)IntroductionAsymmetric information leads to moral hazard and in turn makes market inefficient. Akerlof (1970) explains asymmetric information in the market that conduces to quality uncertainty through 'Lemon' effect. This is a common phenomenon, as both buyers and sellers are uncertain of the products' quality and their prices/values. It seems that the long-run cointegration among prices/values for any particular product is necessary irrespective of the geographical or regional differences in the market. That is why the concept of nationwide exchange-based trading has been developed, considering challenging issues like autonomy, accountability and transparency in the market.With these market challenges, some economic aspects like product price/value integration (both nationally and internationally) and long-run equilibrium behavior among prices/values are required. In this regard, studies like Maibangsa and Sankari (2000), Savadatti (2006), Raveendran et al. (2007), Saran and Gangwar (2008), and Shinoj et al. (2008) analyze the same, applying the standard Engle-Granger and Johansen cointegration methods for different markets. The point is that without long-run cointegration among product prices/values, asymmetric information on them will hinder the competitive behavior of the market. In turn, this will affect the economic factors and activities like valuation of products, production, and trading which are necessary for the development of the economy.Chand et al. (2008) state that with the declining productivity of fruits and vegetables, higher domestic demand is the cause for its higher import than export. Therefore, import substitution policy became the key factor to overcome the crises in the basic needs of the economy. However, this may lead to imbalanced growth with less foreign earnings. In this context, Birthal et al. (2008) argue for infrastructural facilities that will increase the total agricultural output. For the same, improved agricultural market, along with advanced exchange-based trading platform, is necessary where fair product (auction) price integration and its long-run equilibrium relationship are required. This is the crux of the development of any economy. In this context, the present study focuses on the Indian tea auction market. This market is found to be well diversified throughout the country, and price cointegration among domestic and international auction markets is the subject of examination along with the importance of exchange-based electronic trading.Literature ReviewRao and Hone (1974) observe that in the 1960s and 1970s, the Indian tea export declined repeatedly due to rising domestic consumption without expansion of tea gardens, higher cost of replantation, and falling export price. In this situation, some of the East African countries met the demand in the world tea market. As a result, a question mark hangs over the competitiveness of Indian tea industry. To raise it to the desired level with higher domestic production and profitable international prices, they suggest that India should advertise and promote the tea products efficiently matching it with appropriate export quota(s). …
Publication Year: 2013
Publication Date: 2013-10-01
Language: en
Type: article
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