MUMBAI
- India's high inflation rate, hitting three-year
highs at more than 7% and coming amid record food
grain production, is prompting demands for a ban
on the increasing trade in food commodity
derivatives.
The Wholesale Price Index for
food grains touched a record 222.8 this month, up
from 210.4 a year earlier as the overall
commodities derivatives market has climbed to an
average of more than US$3 billion in daily trading
turnover.
The government, which a year ago
banned trading of rice and wheat futures,
appointed a now 13-month-old, four-member expert
committee to check if futures trading is causing
food prices to soar. The expert committee,
expected to issue its findings on
Monday, April 28, was forecast
to refrain from recommending an immediate or
future ban on futures trading in certain
commodities. Futures trading aims to offset
market risks and get better prices to producer,
marketer and consumer, but the current
inflationary crisis has intensified debate as to
whether the gap is widening between rosy free
market theories and the reality of unscrupulous
market manipulation.
Statistics point to
an increasing rush in investments into the global
commodities market, with a Citibank report
claiming that investments in commodity indexes
increased by $40 billion to $185 billion between
January and March this year, a bigger gain than in
the entire 2007.
Yet commodity futures
market keepers deny any link between the increase
in investor interest in commodity trading and
rising prices.
"That futures trading in
commodities causes inflation is a spurious
co-relation," Prabhakar Patil, director of the
Mumbai-based regulator Forward Markets Commission,
told Asia Times Online. "Historically in
democracies, futures trading has often been blamed
for inflation and commodites banned from being
traded, a trend going back to the 19th century."
The Indian government banned futures
trading in urad and tur (two popular pulses widely
used in Indian cuisine), rice and wheat in
February 2007, but government policies
increasingly appear caught by conflicting tussles
between various economic and political forces,
within and outside the government.
Internal conflict has infected the
Planning Commission, India's leading economic
think-tank. Its deputy chairman, Montek Singh
Ahluwalia, has strongly dismissed calls for a ban
on futures trading in commodities and instead
recommends a better-regulated futures market.
But Ahluwalia's Planning Commission
colleague Abhijit Sen, who heads the committee
studying the impact of futures trading on
commodity prices, conceded that the futures market
could be responsible for price increases, an
admission that immediately prompted a meeting of
the committee on April 23 to sort out the
difference of views. No consensus was reached.
Sharad Joshi, a member of the expert
committee and with an agricultural background,
said he found no data to suggest that futures
trading influenced inflation.
Market
analysts believe otherwise. In an article
headlined "Who pushes up your food prices?
Gamblers!" the India-based trade site Commodities
Online says, "The enormous influx of capital has
resulted in the futures markets no longer
reflecting supply and demand. Ironically,
investors have placed their wildest bets on staple
foods. Information about supply bottlenecks and
famines at the other end of the world is not noted
on market quotations."
Studies by the
Switzerland-based Bank of International
Settlements (BIS) have also concluded a clear
co-relation between the volume of derivative
trading in commodities to sharp rise in commodity
prices.
The BIS triennial Central Bank
Survey "Foreign Exchange and Derivatives Market
Activity, December 2007" said the average volume
of daily overall derivatives trading leapt by 73%
since the last survey in 2004, reaching $4,198
billion by April 2007 in a record annual growth of
20%.
India's fast growing commodity
exchanges has grown 50-fold in barely five years
and could expand to $1.8 trillion by 2010,
according to an industry body report.
Sections in India opposed to futures
trading in agricultural commodities, primarily the
communist party allies of the government, are
threatening street-level agitation if the price
rise trend is unchecked.
People's
Democracy, the weekly mouthpiece of the Communist
Party of India (Marxist) demanded in an April 20
editorial that futures trading in 25 agricultural
commodities be banned.
Not just the
communists, but India's leading industry body the
Associated Chambers of Commerce and Industry of
India also on April 20 called for a temporary ban
on futures trading until the price rise crisis is
reversed.
Farmer groups are not impressed
either. "Despite the good [food crop] production,
there is a deliberate manipulation of the market,"
wrote Krishan Bir Chaudhary, president of the New
Delhi-based Bharatiya Krishak Samaj (Indian
Farmers Forum). "The farmers do not gain in the
process as they are paid relatively lower prices
than what the corporate houses quote on the
futures exchanges or in the spot market, or at
what the retail chains sell to the consumers."
Chaudhary has called for the government to
reject "this neo-liberal and corporate-led
agriculture model and replaced it by a
farmer-centric one".
India joined the
global furor and confusion whether commodity
speculators and hoarders are part of the problems
driving up prices, amid fears of the worst global
food crisis unfolding since World War II.
Josette Sheeran, executive director of the
United Nations World Food Program, said on April
22 that rising food prices would leave 100 million
people hungry in every continent.
Soaring
food prices of rice, wheat and other staple grains
are hitting the world's most vulnerable sections,
say aid agency officials.
The Rome-based
United Nations World Food Program, that serves
over 80 million people in 78 countries, revealed
that food aid for 20 million of the world's
poorest children will be reduced.
Rice
prices in Asia soared by 68% in a year, provoking
the world's leading rice exporters such as India
and Vietnam to ban exports of popular rice
varieties, a move deepening anxiety of decreasing
supply and increasing prices.
Suspicions
of artificial inflation could increase. Food grain
production in India is set to touch record levels
of 227.32 million tonnes (mt) this season (July
2007 to June 2008), up 4.6% from the year-on-year
period in 2006-07, according to the third Advance
Estimates of production of major crops grown in
India.
India's stance in the commodities
market could prominently feature in the next round
of the contentious World Trade Organization talks
in Doha, Qatar, tentatively slated later this
summer. The governmental dilemma seems a no-win
situation born out of largely ignoring the
agricultural sector until the pre-election year.
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