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The futures not theirs to see

To tame inflation in food prices, the UPA Govt is examining the option of banning forward or futures trading in farm commodities.

india Updated: Apr 21, 2008 21:37 IST

To tame inflation in food prices, the UPA government is examining the option of banning forward or futures trading in farm commodities. “If forward trading is the reason for inflation, why would we not do it?” stated Union Minister for Commerce and Industry Kamal Nath. The government has already banned futures trading in tur and urad pulses, wheat and rice. But the opposition, including the Left, wants this to be extended to all farm commodities to break the spiralling food prices. So clearly, to take up Mr Nath’s statement about cause and effect, much depends on whether futures trading has indeed contributed to inflation or not.

A report prepared by the Abhijit Sen Committee is likely to be submitted to the government this week that will look into this very question. Obviously, the decision will be a political one as the mandate of the Sen Committee is only to examine the impact of futures on prices. But in the government’s desire to show that it is taking all possible steps to tackle inflation, a ban on futures trading is perhaps inevitable. This is likely, though, to be a mistake. Futures trading provides advance signals about price movement. It enables ‘price discovery’. If the government had heeded these signals earlier, it would have been in a better position to tackle inflation instead of firefighting today. “Futures trading is the messenger and the messenger cannot be killed,” is how, B.C. Khatua, Chairman, Forward Market Commission, sees the government’s plan. And we tend to agree with him.

According to reports, the Sen Committee examined the data for 24 agricultural commodities like rice, wheat, chana, urad, cotton and sugar that have a share of 11.7 per cent in the wholesale price index. On the face of it, the trend growth rate of the index did accelerate in the post-futures period for 14 of these 24 commodities. But this was observed to be more of a rebound in ten such commodities as there was a decline in their prices in the pre-futures period. Does this imply that futures trading is responsible for inflation? Abhijit Sen himself has stated that futures trade will not work efficiently for rice and wheat in which the government has a significant role to play. But none of this warrants a ban on futures trading in all agricultural commodities.