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Supply woes, not speculation, fuel inflation

Supply woes, not speculation, fuel inflation
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First Published: Fri, Feb 16 2007. 03 31 PM IST
Updated: Fri, Feb 16 2007. 03 31 PM IST
New Delhi: India’s politicians are blaming fevered trading in the country’s new futures exchanges for a surge in food prices, but analysts say the inflation is really being caused by consumption rising faster than supplies.
Five years ago when India started futures trading in some basic food commodities it hoped this would help its millions of farmers hedge against price risks.
State-level politicians, who opposed the setting up of the exchanges, say the markets have attracted more speculators than farmers.
But analysts argue that, with the economy expected to grow 9.2% in 2007 -- the fastest in 18 years -- food supplies are failing to keep up with a surge in demand. New Delhi in recent months has had to ease import rules and ban exports of items such as wheat.
“It is a complete misconception and stupid to blame the futures market for fuelling inflation,” said Avinash Raheja, analyst with Commtrendz Research. “There is an absolute neglect on the supply side that is fuelling inflation.”
India’s inflation rate has hit a two-year high of 6.58%, well above the central bank’s target range of 5.0 to 5.5% for the end of the fiscal year in March.
“The real inflation is happening in items like onions, potatoes or tomatoes which are not even traded on the futures exchanges,” said Raheja.
But politicians are increasingly critical of the futures exchanges.
Leaders of several Congress-ruled states have opposed futures trading and a standing committee of deputies in the federal parliament, representing various political parties, said in a report that essential commodities should be kept out of futures exchanges.
“The committee strongly feels that to permit derivatives and options in the name of farmers and small traders is nothing but a ploy for protecting the speculative financial interests,” it said.
Surging Volumes
Trading volumes on the exchanges have almost doubled, with the trading value rising to 27.4 trillion rupees, or $619.8 billion, between April and December 2006, from 14.08 trillion rupees in the same year-ago period, according to the country’s commodity market regulator.
Three exchanges -- the National Commodity and Derivatives Exchange, Multi Commodity Exchange, and the National Multi Commodity Exchange -- were set up in 2003.
Prices of some pulses, a staple protein diet for the poor, now cost as much as meat, while wheat has soared 20 percent in the past year. Vegetable oil prices are up 15 percent. Fruits, vegetables and milk prices have also risen sharply.
Despite a string of measures, including large scale imports of wheat and pulses, prices have not come down, leaving the federal government worried ahead of provincial polls.
Officials at the exchanges argue that it’s not the rise in speculative activity that fuelled inflation.
“We are only a signalling device, a messenger of probable events that are going to come,” said P. Ravi Kumar, chief executive officer of the National Commodities and Derivatives Exchange.
He said production of pulses has stagnated for 12 years while wheat output has remained static for almost seven years.
“Futures prices are definitely becoming a window for anyone to peep, but it will be very myopic to close that window,” said Rajni Panicker, head of research at Man Financial.
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First Published: Fri, Feb 16 2007. 03 31 PM IST
More Topics: Money Matters | Commodities |