Futures ban no panacea for inflation ills: Assocham

NEW DELHI: The government���s decision to expand the ban on futures trading to cover potatoes, soyabean oil, chickpeas and rubber would not help in bringing inflation down, feels India Inc.

The real culprit is virtual stagnation in food production since 1999, says a study by Assocham which is to be submitted to the finance and commerce & industry ministries this week.

The study says that rather than banning futures trading, the government should ensure high volumes and strong liquidity in the futures market to stabilise prices.

���The ban on futures trading in rice and wheat has not helped. Prices of these foodgrains have only increased,��� Assocham president Venugopal Dhoot said. ���When experience shows results to the contrary, how can we expect the ban on items like potatoes and soyabean oil to help in reducing inflation,��� he questioned.

Without speculation, there is no opportunity for risk management. The chamber feels that ���too much regulation��� is hampering the functioning of the commodity futures market and this was highlighted in the case of urad and tur. Rumours of ban in trading drove away market-makers and this resulted in low volumes and wide price swings.

���It is important to realise that futures market and physical markets are influenced by a common set of factors, supply and demand. An efficient futures market is merely a reflection of the future spot markets. Hence the ban on futures trading is devoid of economic logic,��� says the study.

Assocham arguments are interesting since industry chambers usually appreciate the government rather than contradicting its views. The study comes close on the heels of a study by Planning Commission member Abhijeet Sen which has not recommended scrapping of the ban on futures trading in key commodities. After the report was submitted, the government expanded the ban on potatoes, chickpeas, soyabean oil and rubber.

While political pressure and criticism over mounting inflation were the key factors behind the ban, the industry���s view is that the government should address foodgrain productivity. While population is growing at 1.9% per annum, foodgrain production is stagnating.

���Hence consumption of cereals has declined from a peak of 468 gms per capita per day in 1990-91 to 412 gms per capita per day in 2005-06, indicating a decline of 13%,��� says the Assocham study.

In other words, the writing was on the wall and efforts should have been made to improve production and supply.
To ensure adequate procurement and buffer stocks, the study calls for purchase of foodgrains by government at market prices rather than minimum support price (MSP).

The argument made by the chamber is that MSP should function as a cushion for farmers while the government should compete with private trade to purchase foodgrains at market-determined prices.

The government faced difficulties in procurement during recent years as private trade was willing to offering better prices. This led to difficulties in meeting buffer requirements and providing supplies for public distribution system (PDS).