Futures trading ban no solution

Futures trading ban no solution

Commodity market players who have been busy arguing that futures trading in agricultural products is not responsible for inflation have reason to feel vindicated: the chairman of the new committee on forward trading agrees with them.

The banning of forward trading is no solution to inflation, says Abhijit Sen, who also serves as a member of the Planning Commission.

“It was a last-moment political decision," he adds, explaining the ban on the trading of certain commodities that was enforced on 28 February. The committee that he heads will have to find out whether futures trading in commodities has been responsible for an increase in prices, but Sen is already reasonably certain that it doesn’t.

It was on Tuesday evening that Sen, an economist of note—he has a reputation of being able to look at reams of data and spotting trends—and a professor who is currently on leave from New Delhi’s Jawaharlal Nehru University, once the bastion of the communist intelligentsia, first heard about being appointed as the chairman of the committee on forward trading.

“The notification hasn’t come out, so how do we know when we are meeting?" he asks, responding to a question on when the committee would meet. Sen’s association with the government dates back to 1997 when the United Front, which was ruling the country, named him chairman of the Commission on Agricultural Costs and Prices.

India’s futures market in commodities is only five years old, but it already boasts of a huge turnover, higher than that of the country’s largest stock market, the National Stock Exchange. Several people, including some ministers and politicians, have claimed that speculative activity in this market has caused prices of commodities to soar.

Sen does not think so. “Even though there is an initial rise in spot prices, the overall impact of futures trading on prices is stabilizing," he says. According to him, inflation has risen on the back of a combination of factors: the price support regime for agricultural products, the public distribution system, and several others. All these, he claims, have an impact on prices and inflation, and merit “deeper study."

The government’s decision to ban futures trading in some commodities and create the committee headed by Sen, is part of its fight against inflation. The elections in several states—the Congress lost power in Uttarakhand and Punjab—and media coverage related to inflation forced the government to act, says Sen, who is convinced that more open-market operations could have helped.

The Indian agricultural sector is heavily regulated, and successive governments have fought shy of tinkering with existing sops and subsidies, except to add more.

Despite that, Sen is confident that the sector will grow faster this year. “The real reason is that we have increased public investment in agriculture by over 40-50% over the past three years, and this continues in the Budget. Agriculture was on no one’s radar, now even some states are putting it back on. And inflation will have some positive impact on farmer’s income."

The chief executive of a large commodity firm praises Sen’s erudition but refuses to be drawn into commenting on what the committee could decide. Sen’s own comments on forward trading make him sound like the free-market proponent he is not. For instance, he doesn’t think an open global commodities trading market is a good idea. “With more open trade, a lot of global market uncertainties come in," he says. “Can we expose (our) farmers to such risks?"