Rescind ban on commodity futures – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/rescind-ban-on-commodity-futures/articleshow/88398028.cmsSynopsis

Futures contracts in rice and wheat, commodities of which the government holds very large inventories that could be dumped on the market at short notice, are dicey at the best of times.

The Centre’s move to suspend futures trading in seven agricultural commodities for one year is retrograde. The ostensible reason is to fight inflation. This shows lack of faith in market mechanisms, whereas the government’s stated policy has been to let the market play its rightful role in sorting out the farm sector’s assorted problems. The futures market indicates expert opinion, backed by financial outlays, on likely demand and supply, provides price certainty to farmers and links prices in India to global ones. Banning futures removes these benefits off the table in one stroke.

Trading in futures contracts has been suspended with immediate effect in paddy (non-basmati), wheat, chana, mustard seed and its derivatives, soya bean and its derivatives, crude palm oil and moong. The suspension will result in the loss of a beneficial price discovery mechanism and is likely to drive speculation to physical markets. That is wholly avoidable. Farm produce has to open up to global markets and farmers must be allowed to discover prices so that their work becomes that much less of a gamble, helping incomes grow. Reportedly, the rise in food prices of late has put the government under pressure. Consumer price inflation for November rose to a three-month high of 4.91%. There are worries that the RBI could raise policy rates to rein in inflationary expectations.

Futures contracts in rice and wheat, commodities of which the government holds very large inventories that could be dumped on the market at short notice, are dicey at the best of times. Another source of risk is the government’s propensity to impose bans on export of farm produce, again, in an effort to contain inflation. This, too, hurts farmers and the government’s own credibility on its trust in the efficacy of market mechanisms. Uncertain policy on farm trade, fluctuating between bans and incentives, should give way to functional commodity futures and options, rational stockholding of certain vital commodities and switchover from subsidy to investment in the farm sector.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s