Rice, wheat can be problem: Sen

Rice, wheat can be problem: Sen
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First Published: Sat, Apr 19 2008. 12 57 AM IST
Updated: Sat, Apr 19 2008. 12 57 AM IST
The Abhijit Sen committee is set to caution the government about pitfalls of allowing futures trading in rice and wheat even as it won’t take a position on generally allowing or disallowing such practices, as part of several suggestions for improving trading of agricultural commodities in India.
“The fundamental problem with futures trading in foodgrains is that the huge difference between global prices and Indian prices will always reflect on and contribute to the instability in local prices,” said Sen in an interview with Mint.
Sen said futures trade can never work very efficiently in commodities where the government has a significant role to play, “where even the spot market is highly controlled”.
Because it buys grains and distributes them to the poor at subsidized rates, the Indian government remains the biggest player, buying up to 35 million tonnes (mt) every year and fixing prices in rice and wheat markets.
Sen said he expects to submit the report of the committee in a week.
The Sen report assumes fresh importance in the context of India’s opposition parties wanting a ban on futures trading, currently restricted to tur and urad pulses, rice and wheat, extended to all commodities to counter the current spurt in inflation that touched 7.41% in the last week of 2007-08, before moderating slightly to 7.14% in the week after.
Meanwhile, most Parliament members, including those in the ruling Congress party, as well as the Parliament’s standing committee on agriculture, are generally believed to be against futures trading.
The committee discussed the draft report on Thursday and members were asked to send their final suggestions. The final report can then be submitted to Union agriculture minister Sharad Pawar next week “unless there is any major dissenting view, which I don’t expect,” said Sen.
Other than examining the extent of the impact of futures trading, the terms of reference for the Sen committee set up over a year ago were “to suggest ways to minimize the impact” and make recommendations for “increased association of farmers in the futures market/trading so that farmers are able to get the benefit of price discovery through commodity exchanges.”
Pawar said on Wednesday, while replying to the debate on price rise in Parliament, that he had given Sen 10 days to submit the report.
“If it does not, we will talk to the Forward Markets Commission and take a decision,” he said.
The Forward Markets Commission (FMC) is the regulator for commodity markets in India.
Sen notes that few farmers—and for that matter, even traders—were currently active in the futures market.
“Most of them, especially the small ones, are geographically or physically far away from the market,” he said. “There is a strong market in edible oils but, they are mostly firms. In such a situation, how can they effectively utilize futures, which is essentially used for hedging and reading risk.”
In India, he said, one cannot read risk well partly because of the way markets fail to function and as they are not connected, and partly because of the several rules and restrictions imposed by governments, especially in commodities they are active in.
Agricultural markets in India are highly unconnected and fragmented. For instance, even as wheat farmers in Punjab and Haryana are aggressively lobbying for higher wheat prices, prices are ruling at below minimum support levels in Bihar, points out Ashok Gulati, director in Asia for the International Food Policy Research Institute (IFPRI). The government has promised to buy wheat from farmers at prices that are 33% higher than prices paid during the last season but, still lower than imported prices of wheat.
Meanwhile, there are apparently differences among the members of the Sen Committee over issues that are beyond the mandate of the group. Some members of the committee are understood to be lobbying for a rise in wheat prices, or awarding a bonus of Rs60-100 a quintal to farmers on the eve of the rabi harvest, to be part of the recommendations. Despite policymakers and economists believing that the coming rabi wheat crop will top the estimated 74.8mt, prices have started rising.
Gulati says that “a bonus makes sense, especially when your imports are costing Rs1,600 a quintal. Remember, the government’s price is only a minimum support price (MSP), and the private trade can and do buy grain higher than MSP.”
The Sen Committee, notified on 2 March 2007, had sought several extensions partly because of price data problems and partly because of difficulty of coordination among members based in different cities.
Other members of the committee include Rajya Sabha member Sharad Joshi, FMC member Kewal Ram, Indian Institute of Management (IIM), Bangalore professor Prakash Apte and IIM Ahmedabad professor Siddharth Sinha. The government suspended futures trading in wheat and rice on 28 February 2007.
Finance minister P. Chidambaram, while declaring the ban in the Budget, also announced the decision to set up a committee under Sen to study the “extent of impact, if any, of futures trading on wholesale and retail prices of agricultural commodities”.
But, commodity exchanges and some leading agricultural economists want the ban to go as they believe that if there was no ban, the government would have been better placed to tackle the current inflation.
“Futures trade acts like a thermometer catching the extent of a fever. The signals from the trade would have told the government long ago that prices were going to shoot up and it could have planned timely fiscal measures against inflation,” said P.H. Ravimohan, managing director and chief executive of National Commodity and Derivatives Exchange Ltd, a commodities trading exchange operator.
For instance, in edible oils where half of India’s demand is met from imports, global prices had shot up and firms were expecting a cut in customs duties in the Budget to help consumers. “When that didn’t happen, probably because the government had no indication, prices went up domestically.”
Agreeing that the rice and wheat markets presented a tough challenge for future trade in India, IFPRI’s Gulati said “the government can still take is cue from the Chicago Board of Trade rates and be better prepared to tackle supply shortages.”
The basis of the Sen Committee report is a study by IIM-B professor Gopal Naik. The study failed to find a sound correlation between futures trading and the volatility in prices of essentials over 2006-07.
In the seven commodities studied, including rice and wheat, the report found, even if there was volatility, they were triggered by supply shortfall, high global prices and seasonal factors, and not so much due to futures trading. The data for rice were not enough to prove any volatility.
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First Published: Sat, Apr 19 2008. 12 57 AM IST