The ill-advised ban on futures trading in four more agricultural commodities (rubber, gram, soya oil and potato), following similar action earlier against an earlier set of four commodities (wheat, rice, urad and tur), has been widely criticised, as should have been expected. What has come as a surprise, though, is the dismay expressed openly by the Forward Markets Commission (FMC) chairman, B C Khatua, who is the regulator for such trading. Perhaps even more surprising is the reaction, on more or less similar lines, from the Planning Commission member, Abhijit Sen, who chaired the committee on futures trading. The committee failed to find any correlation between such trading and price rises in the traded commodities. Prof. Sen has called the ban a case of overreaction by the government.
Of the several observations made in media interviews by Mr Khatua regarding futures trading and the current inflation levels, two merit attention. First, he has averred that there is no indication of futures markets behaving in a manner that is contrary to the physical markets. And secondly, he has maintained that FMC records show high hedging activity on futures trading platforms (rather than open interests) and that this is being done mostly by retail players, as institutional players like banks and funds are not allowed participation in this market. This should dispel the speculation factor that has so often been held guilty of pushing up prices, for curbs on futures trading.
his apart, there are other reasons as well which make this move illogical as also irrational. For one, the very choice of the commodities and the timing of banning their futures trading seem weird. Potato and rubber can be the cases in point. The country has bagged a bumper harvest of potatoes and prices have nosedived for want of adequate cold storage facilities in the growing areas. In fact, there have been reports of potato farmers committing suicide in the Etawah area of Uttar Pradesh for not getting either a good price for their produce or storage space for it. Still, potato has been de-listed from futures trading. Rubber prices, on the other hand, have been ruling high, albeit in tandem with global trends, influenced by the tight supplies and burgeoning demand driven by high prices of fossil fuel-based alternatives of natural rubber. However, with the rainy season being round the corner, prices are in any case expected to begin softening soon. Besides, unlike in other commodities where the growers on their own have not been able to hedge their price risks through the futures trading, in rubber such hedging has caught on among the small and medium planters.
It is, therefore, unclear as to what the government hoped to achieve by imposing the needless bar on futures trading in such commodities. If the government's action was prompted by political pressure from its Left allies, or the need to appear to be doing something to tame inflation, it is all the more regrettable. What is really called for today is to streamline futures trading so that it can provide reliable price signals for supply management. Also needed is the introduction of options trading for facilitating price risk management by the farmers, if not individually, at least through aggregators. For this, the Bill to amend the Forward Trading (Regulation) Act, which was enforced through an Ordinance but shelved subsequently, needs to be resurrected.
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