Volatile futures

Inflation in essential commodities can be attributed to unrestrained trading in the futures market where the discrepancy between real supplies and speculative volumes is so huge as to be utterly absurd. The UPA regime is clearly susceptible to the same political follies as the NDA government

Kamal Nayan Kabra Delhi


The ideological fixation with the policy of liberalisation, and the rise to domination of associated sectional interests who benefit from and hence sustain this trend are manifestly evident in the unviable continuation of permission for futures trading in as many as 103 commodities. The recent rise in the prices of key essential commodities has little basis in the relations of supply and demand in the real economy. This selective inflation is confined largely to those goods in which futures trading is going on. This has exposed the real character of the futures trade. To add to this mischief, the regulatory controls on actual trade in essential commodities were removed by the votaries of marketisation.

True, both the disastrous decisions were the handiwork of the NDA regime. But leaving them intact and sticking to them in the face of such grossly negative outcomes suggests that the UPA is equally ideologically and socially committed to the same old brand of market liberalisation. Here a crucial anomaly must be pointed out. Real merchandising interests have shown no enthusiasm for the futures and lately have taken to the streets to oppose this domination and destabilisation of the trade by the speculative financial interests.

Some recent facts about the futures trade tell a sordid tale of how the real interests in commodities are being systematically undermined by the speculative operators who are not even financial intermediaries in the supply-demand chain. They constitute a separate transaction loop that intersects with the real market chain. Because of the nature of their operations they have a determining role in current price trends. Without any resultant benefit to the growers, consumers are fleeced as the spot prices tend to move in sympathy with the futures prices. From 5.1per cent of the GDP in 2003-04 the turnover of the futures market in India has shot up to 66 per cent of the GDP in 2005-06 (at over Rs 21 lakh crore). To put this figure in more familiar perspective, this figure exceeds the turnover of the Bombay Stock Exchange.

This high volume obviously has little relation with the total supply of the commodities traded in the futures. To suggest that it is the growers who are participating in futures of such mammoth magnitude is simply a demonstration of colossal ignorance of what the Indian farmers are like and what they can do. Some examples of the absurd discrepancy between the real supply and the volume of futures contracts are worth noting. Urad supply last year was 2 lakh tonnes; its futures trade volume was over 10 times. Gram supplies in real terms was to the tune of 60 lakh tonnes, but the futures trade was of the order of 742.55 lakh tonnes.

But this nothing compared to the behaviour of guar seed whose disproportion is simply mindboggling: for 6 lakh tonnes of actual supply the volume of futures contracts was 1692.6 lakh tonnes, valuing a little less than Rs 3 lakh crore. The result is bound to be high price volatility as is indicated by the price behaviour of guar seeds which in a period of six weeks rose by 63 per cent. Between September 20 and December 9, 2006, the price of Burmese urad went up by 63-74 per cent and declined by 16-17 per cent.

The behaviour of the prices of wheat, sugar and pulses during the last few months is a result of the deadly combination of total deregulation of actual physical trade and the protection provided to the resulting stockpiling by resorting to futures transactions. Irrespective of the minimum support price (MSP), the big traders and food processors (a fancy name for manufacturers of commodities like flour, besan, biscuits, bread, etc), who are permitted to make purchases directly from the growers outside the regulated markets, were able to dent the public procurement. This deprived the government of a potent instrument of price control and food security for the vulnerable sections.

The fear of  adverse price movement jeopardising the profit prospects of these big trades was largely unreal because as one moves way from the post-harvest period Indian food prices almost invariably increase. But the prospects of competition among the oligopolists driving prices down were taken care of by entering into futures contracts at high prices. With low public operating and buffer stocks, the government had no conventional instrument to rein in the prices.

Moreover, its blind faith in the price stabilising role of the futures (never shown to be correct) made it ignore the pressure put on prices by the wild

speculation in many commodity exchanges inviting on-line and off-line trading. This policy is followed without ensuring whether the participants have any need for an instrument of price risk management from the futures contracts. Thus the market has become a casino with an overwhelming majority of

speculators and hardly any presence of the real merchandising interests.

Anyone who knows the really existing and operating futures knows that it cannot be an instrument of price stabilisation and thus makes itself redundant. In the case of commodities with limited physical volume and market domination by a small number of big operators with huge liquid, black and white money floating in the economy looking for easy opportunities of making a financial killing and the prevalence of public controls and regulations in the real commodities markets, permitting futures trade is in every sense an inappropriate policy which is bound to produce a series of negative outcomes and disturb macro-economic and social stability. In 1942 and 1962, the then governments banned futures trading for the sake of price stability.

The prices prevailing in the futures exchanges cannot provide any guidance to the growers about future price trends as these prices are highly volatile both during intra-day trade and over time. In any case, the farmers would go by their own price realisation rather than take the gamble of relying on the futures prices which in any case they have little means of knowing. It is high time that social control over the private trade in food grains, inevitabile in the Indian conditions with such a high degree of differentiated market power among the various market participants and criticality of stable food prices, is restored along with its firming up to overcome the past weaknesses like not even knowing how much food is available with the private trade.

This step would not presently be effective unless the totally uncalled for futures trade in essential commodities is not rescued from the clutches of the speculators. If the UPA government is not just trying to score brownie points vis-à-vis the NDA government and is serious about reasonably stable prices of the goods essential for the aam adami, it must ban futures trading in these commodities.