Don't link commodity futures & inflation: Basu

NEW DELHI: Chief Economic Advisor to finance ministry Kaushik Basu on Friday said futures trading in commodities allowed efficient price discovery and will not fuel inflation, articulating the need for a clear policy on this sensitive issue.

Futures trading in agri commodities have often been blamed for high prices and the government has even banned or suspended trading occasionally. Trading in sugar futures was suspended till June 2010 when prices began to rise in May last year.

Rice, urad, and tur are other commodities in which futures trading have been suspended.

“You cannot link the two ( commodity futures and inflation)... The reason why I am personally in favour of allowing futures trade in commodities is because it is not going to make inflation worse,” Mr Basu said at a FICCI seminar on de-risking the futures trading in commodities.

Even the government has admitted in Parliament that commodities in which there are no futures trading have also shown sharp acceleration in price rise. Futures trading in urad and tur were suspended in January 2007 but the prices of these commodities rose sharply.

The government had even set up a committee to investigate if there was any link between prices and futures trading. The committee had concluded: “... no strong conclusion can be drawn on whether introduction of futures trade is associated with decrease or increase in spot price volatility.’’

The policy flip-flop has discouraged the development of a sound futures market in agri-commodities, which Basu felt was extremely important for many stakeholders to take a position to manage price risk.

However, he added it should not be left unregulated as there are possibilities of people getting cheated.
Futures trading is regulated by the Forward Markets Commission, which is under the jurisdiction of the ministry of consumer affairs, food and public distribution.

Forward Contracts (Regulation) Act, 1952 does not prohibit futures trading in any commodity. At present, 106 commodities are notified for forward trading.

The oversight of the commodities market has also been a matter of debate with some experts arguing it should be regulated by the stock market watchdog Sebi.

The government’s storage and release mechanism of foodgrains needed to be improved to manage the prices, Basu said.

“We need to give much more thought on foodgrains management to protect the most vulnerable section of the population...I think this mechanism can be improved by bringing in private sector into play,” he said.

“The government should not be the only agent that is trying to take this risk on its shoulders,” he said.

He pointed that from January the government has been releasing foodgrains in smaller stocks and some of the downward pressure on food prices is probably due to this fact and this mechanism is managed better but not good enough.