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Needed: commodity bears

Needed: commodity bears
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First Published: Mon, Jun 02 2008. 11 01 PM IST
Updated: Mon, Jun 02 2008. 11 01 PM IST
In 2007, the government banned trading in wheat, rice, tur and urad futures in the commodity markets. More recently—in May —futures trading in soya oil, grams (channa), potatoes and rubber was also banned. This was done in a bid to curb rising inflation, which supposedly has been caused by a speculative rise in the prices of these agricultural commodities.
It is widely accepted that a sustained speculative price rise cannot take place without hoarding. Whether we have the necessary infrastructure in our country which allows speculators to indulge in such activities in agricultural commodities is debatable. In any case, a short-term speculative price rise could be caused by cartelization—without necessarily resorting to hoarding.
In this article, I shall refrain from addressing the issue of whether the price rises are largely due to speculative behaviour or not. Rather, I shall try to address this issue assuming that speculation has indeed substantially caused the price rise. And, my solution would not have any negative impact even if this assumption is wrong.
We desperately need bear speculators. And we need bear speculators which are very well funded. Currently, non-bear traders (i.e., bulls, arbitrageurs, other entities which frequently change their views on the direction of price movement) pay a commodity transaction tax (CTT) on all trades. They are also currently liable to pay tax at the rate of 30% on their speculative income or gains.
Let’s incentivize entities which are committed bears. Committed bears would be defined as entities which are either net short or square at all times. This can be monitored by the commodity exchanges. It would be appreciated that committed bears will make a gain on a trade only when the price falls. The incentives for committed bears should be a waiver of the CTT (on both sell and buy trades—as long as it is always net short) and, more importantly, a tax exemption on the speculative income or gains.
If the government gives the suggested incentives to this new category of “committed bears” and promises to keep them in place for a reasonable period of time, these would act as a very big factor in attracting market participants which have a bearish view on agricultural commodities. It would help attract foreign money for this bear activity. Of course, the incentives should be flanked by stiff penalties for non-compliance with the criteria laid down for committed bears.
Perhaps, deposits (as a security) with the Forward Markets Commission could be made mandatory for committed bears. Moreover, the open position limits for committed bears on each contract should be many times that of non-bears.
In overseas markets in recent times, entities such as Pacific Investment Management Co., Paulson and Co., Prudent Bear, etc., have made huge gains (or at times simply avoided losses) because of their bearish views in certain markets. Bears are an integral part of the financial ecosystem and should be encouraged. In the absence of bears, bulls will ensure that agricultural commodity prices are sticky downwards even if we have a bumper crop.
The government need not worry about very low prices if the committed bears prove to be hugely successful—this is because the government already intervenes with a minimum support price. That will provide a floor to many agricultural commodities.
What if the above plan fails, or if the price rise in agricultural commodities is not substantially due to bull speculators? Not to worry. Committed bears can never cause a price rise and, hence, the proposed solution simply cannot add to the problem!
A.M. Godbole is an executive assistant, AV Rajwade and Co. Pvt. Ltd. These are his personal views. Comment at views@livemint.com
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First Published: Mon, Jun 02 2008. 11 01 PM IST