Time for a trade-off
Any government of the day is duty-bound to take measures to insulate ourselves from global speculation and protect the livelihood of our people, writes Sitaram Yechury.india Updated: Apr 25, 2008 11:31 IST
Notwithstanding the projections of a bumper food crop and a marginal decline in the wholesale price index (WPI), India continues to reel under the impact of spiralling prices of essential commodities. The WPI can never capture this reality, given the way it is designed. In the basket of commodities used to calculate the WPI, food articles account for a mere 22 per cent.
The UPA government cannot absolve its responsibilities in tackling this price rise invoking the excuse of a ‘global phenomenon’. Yes, it’s true that there is a global wave of food price inflation. The United Nation’s World Food Programme (WFP) — the largest distributor of food aid — describes this as a ‘silent tsunami’. The Economist informs that food riots are erupting in many places across the globe. This inflation is pushing billions of people back below levels of absolute poverty globally. Merely to distribute the same amount of food as last year, the WFP would need an extra $ 700 million this year. For us, in India, this means the further widening of the hiatus between ‘shining’ and ‘suffering’ India. This will swell by many lakhs the already huge numbers of children (50 per cent) and pregnant mothers (78 per cent) suffering from malnutrition.
One obvious reason for this has been the global decline in foodgrains production. Pre-occupied with the pursuit of the neo-liberal economic policies anchored more in speculation than in production, the current phase of globalisation is rendering itself, as predicted by some of us, to be unsustainable. The rise in the prices of petroleum products has a big impact on food prices pushing up input costs. The shift towards bio-fuels is also impacting food prices. The US, for instance, has earmarked 20 per cent of its production of maize for bio-fuels. The amount of maize that is required to fill the tank of an average car is equivalent to the annual consumption, as staple diet, of an average well-bodied male.
While these are issues that merit global attention as well as policy shifts in individual countries, one needs to examine why during the last one year, the prices have shot up dramatically? For instance, the global price of wheat has shot up by 130 per cent while that of soyabean by nearly 70 per cent. This can mainly be explained by speculation in the foodgrains commodity exchanges. This is directly related to the current recession in the US, triggered by the sub-prime home loan crisis that has left many financial giants on the brink of bankruptcy. To cut their losses, global speculators have chosen to shift their operations of derivative trading to the commodity exchanges.
Derivatives are shadow financial instruments that include futures, options, forwards trading. If one buys or sells a share in the stock market, then it is actual trade. However, if one buys or sells the option to buy or not to buy a share, then it is derivative trade. The seller of the option, believe it or not, need not own that share. Likewise, the buyer need not pay the full money for the share. Such speculation in the global commodity exchange markets is playing havoc with food prices.
According to the Bank of International Settlements, as of December 2007, the total value of derivative trade stood at a staggering $ 516 trillion. This has grown from $ 100 trillion in 2002. Thus, this shadow economy is 10 times larger than global GDP ($ 50 trillion) and more than five times larger than the actual trading in shares in the world’s stock exchanges ($ 100 trillion) (S. Gurumurthy, The New Indian Express, March 28, 2008).
Any government of the day is duty-bound take measures to insulate ourselves from such global speculation and protect the livelihood of our people. After all, if inflation is a global phenomenon, so is bird flu. Do we not take measures to protect ourselves from the spread of this disease? Likewise, it is incumbent upon the UPA to shield ourselves from such massive global speculations.
In the past, through a mechanism of procurement (minimum support price for farmers) and distribution (public distribution system) we could protect ourselves from speculative global uncertainties. However, since embracing the liberalisation trajectory, this mechanism has been eroded to facilitate private trade and speculation. It is a weak excuse for this UPA to invoke the former NDA’s notification dated 15.2.2002 amending the Essential Commodities Act to the effect that ‘any dealer can freely buy, stock, sell, transport, distribute, dispose, acquire, use or consume any quantity of wheat, paddy/rice, coarse grains, sugar, edible oil seeds, edible oils, pulses, gur, wheat products and hydrogenated vegetable oil or vanaspati and shall not require any licence and permit therefore’. This needs to be immediately rescinded if the effects of global speculation are to be diluted. The net result of this has been a drastic reduction in the procurement of foodgrains by the government. The Commission for Agricultural Costs and Prices estimates that on October 1, 2008, the rice stock in our country will be 5.49 million tonnes as against a buffer norm of 5.20 million tonnes. The wheat stock will be 10.12 million tonnes, lower than the buffer norm of 11 million tonnes. On the other end, the PDS is being undermined with the supply of foodgrains to the states drastically cut because of fall in procurement — an ominous situation of growing food insecurity in our country.
While the procurement and distribution mechanism needs to be strengthened immediately, speculative private trading in essential commodities will have to be prohibited. The multi-commodity exchange in India averages volumes of over $ 3 billion a day. During the financial year 2007-08, the cumulative value of trade in this derivative market was a whopping Rs 4,065,989 crore. This is the dimension of speculative trading which is making huge super profits. In order to make such super profits, the government must be made so helpless that it should not have large stocks to dampen the spot prices at any moment. On the other hand, private trade must have adequate stocks to intervene to keep the prices high. For this to succeed, it is necessary that no effective mechanism for distribution of foodgrains must exist in the country. This is precisely what has occurred under liberalisation resulting in this price rise. Thus, it is not inflation but speculation that is being imported.
Take just one example of guar seed. Total production in 2005-06 was six lakh tonnes. The volume of futures trade was 1,692.6 lakh tonne valuing Rs 292,664.59 crore. With such a staggering levels of speculative trading relentlessly pushing up the prices, the only way to provide relief to the people is by prohibiting speculative derivative trade in 25 essential commodities.
Apart from seeking solace by humming Que sera, sera, this government must ban futures trading heeding what its own chairperson told the Congress Parliamentary Party in August 2006: “The Prime Minister and I had a meeting with our Chief Ministers. They were unanimous that forward trading, particularly in wheat, has had an adverse impact and called for a more effective framework to deal with speculation.”
Sitaram Yechury is MP, Rajya Sabha and member of CPI(M) Politburo.