May 12, 2008	Monday	Jamadi-ul-Awwal 6, 1429

IN a widely expected move, the United Progressive Alliance (UPA) government last week suspended futures trading in four commodities for four months, in a bid to curb rising inflation.

Succumbing to pressure from the Left parties – which provide outside support to the UPA government – the authorities directed the Forward Markets Commission (FMC), the industry regulator, to suspend trading in soy oil, chana (chick pea), potato and rubber for four months.

Over a year ago, the government had ‘temporarily’ suspended trading in wheat, rice and two pulses – urad dal and tur dal – to curb inflation trends. The move failed to rein in prices – in fact inflation has soared since then – yet the suspension in trading in these four commodities continues.

In fact, last month, an expert committee – headed by economist Abhijit Sen - that had been set up by the government to study the impact of the ban on futures trading in the four commodities on spot prices found no direct link between the two.

FMC chairman B.C. Khatua – who has been opposed to the imposition of bans on commodities trading – is critical of the government’s decision. “It is quite unfortunate that the government banned trading in the four commodities despite there being strong evidence indicating no link between futures trading and rising prices of these commodities,” he says.

But the suspension would considerably hurt the exchanges, significantly reducing their turnover. Khatua estimates that the turnover of the National Commodity and Derivatives Exchange (NCDEX) would fall by 60 per cent, and cripple the Indore-based National Board of Trade (NBOT), which deals in just one single commodity – soy oil.

The FMC chairman, however, is confident that the suspension on trading in all eight commodities would be lifted by September. Of course Khatua is overly optimistic – the lifting of the suspension would depend on several factors.

The most important of course is the ability of the government to curb inflation. Senior ministers have been claiming that recent efforts of the government would start paying dividends and the wholesale price index – which had touched 7.57 per cent last month, breaking a three-year high – would start climbing down.

The south-west monsoon, expected to set in on time this year, will also have a major role to play in the government’s decision to lift the ban on futures trading in the eight commodities. The met office has predicted normal monsoon, but any deficiencies could once again ratchet up commodity prices, stoking inflation and decelerating agricultural growth.

Another important factor is the outcome of elections to the Karnataka state legislature, being held later this month. A lot depends on the performance of the Congress, which is still undecided on whether to advance general elections due to be held in 2009.

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THE government of course has justified the move to curb forward trading in the four commodities, even at the risk of appearing to be anti-liberal. Finance Minister P. Chidambaram last week told the annual meeting of the Asian Development Bank in Madrid – before the curbs were imposed – that India was facing “a grave crisis on the food front” and that he was under tremendous pressure to suspend forward trading in a few more food articles.

“If rightly or wrongly, people perceive that commodity futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,” said the articulate finance minister. The ‘people’ that Chidambaram was referring to were mostly MPs from the Left parties who provide crucial support to the government.

The leftists, traditionally opposed to most free-market institutions including the stock and commodity markets, have blamed futures trading in commodities for rising inflation. But they have failed to back up their allegations with evidence, and even the government-appointed expert committee could not find any conclusive link between the two.

Trade and industry have not taken kindly to the restrictions imposed by the government. The Soyabean Processors Association of India (SOPA) believes that curbing futures trading of soy oil would not help the government curb inflation.

India is a major importer of edible oil and the second-largest importer of vegetable oils. Imports meet half its edible oil requirements. According to Rajesh Agarwal, a SOPA spokesperson, India imports about five million tons of edible oil every year. International edible oil prices have been high, impacting prices here. India imports soy oil from Brazil and Argentina.

But soy oil price has been declining over the past few weeks, and has come down from over Rs80 a litre to Rs62 at present in the retail market. The ban on futures trading is not likely to lead to any further declines, he avers.

In the case of chana, demand has been soaring, but production has been stagnating for years. This year chana production is expected to be down by nearly five per cent, hovering around six million tonnes. Incidentally, soy oil and chana are among the most traded commodities on the markets.

The worst affected by last week’s ban would be farmers growing potatoes. A bumper production has resulted in a glut in supplies, leading to sharp declines in potato prices. Spot prices have tumbled by nearly 30 per cent over the past two months. Traders fear that prices may crash, especially since they would not be able to hedge it on the futures market.

The rubber industry too has been critical of the ban imposed on futures trading. Rubber prices have been on the rise globally, following the spurt in oil prices. According to Sajen Peter, chairman, Rubber Board, the rise in rubber prices was because of low stocks and escalation in the price of crude oil. International oil prices were last week headed to the $125-mark.

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THE four commodities account for a daily turnover of nearly $300 million on the two major exchanges – the NCDEX and the Multi Commodity Exchange of India (MCX). There are nearly two-dozen commodity exchanges in India, with an annual turnover of nearly a trillion dollars.

Commodity trading is nothing new to India. The first such exchange was established way back in 1875, when the Bombay Cotton Trade Association began trading in cotton. Before Independence, there were nearly 300 commodity exchanges in India.

However, futures trading in commodities were banned at the peak of the socialist era in India in the 1970s. It was restored only in 2003. Today, there are 20 small exchanges, besides the major ones including MCX and NCDEX (both based in Mumbai), and the National Multi-Commodity Exchange (NMCE), Ahmedabad, and the National Board of Trade (NBOT), Indore.

The MCX accounts for 80 per cent of the turnover and the NCDEX for about 10 per cent. International investors have been eager to invest in the Indian commodity exchanges. Fidelity International Ltd and Citigroup have a stake in MCX. Earlier this year, the NYSE Euronext, which owns four exchanges in Europe, and the New York Stock Exchange, acquired a five per cent stake in MCX.

The largest commodity exchange in India also offers trading in carbon credit, making it one among the top three commodity bourses in the world – including Chicago Climate Exchange and European Climate Exchange – to offer such a product.

Goldman Sachs and European energy trading major Intercontinental Exchange have a stake in NCDEX.

About 100 commodities are traded on these exchanges including bullion (gold and silver), metals (steel, aluminium, copper, lead and nickel), energy (crude oil and coal) and agri products such as cotton, coffee and spices. When commodity trading was revived about four years ago, the total turnover was about $17 billion; this has ballooned to nearly a trillion dollars now.

According to the Associated Chambers of Commerce and Industry of India, commodity trading is expected to top $1.8 trillion in just about two years. That is if the government stops fiddling around with temporary bans and curbs.