On futures trading, Budget tripped up Survey

Going against its own positive assessment on the commodity futures market, the government has proposed in its Budget a wholesale ban on futures trading in commodities like wheat and rice.

Going against its own positive assessment on the commodity futures market, the government has proposed in its Budget a wholesale ban on futures trading in commodities like wheat and rice. The decision runs contrary to the Economic Survey 2006-07, presented a day ahead of the Union Budget, which said that a well-developed commodity futures market resulted in “efficient price discovery of the respective commodities and does not impair the long-run equilibrium price of commodities”.

In January 2007, the government imposed a temporary ban on futures trading in urad and tur dal. This time, the government took a short-run view of what the Economic Survey proclaimed as “some aberrations” and “bandwagon effect” inherent in any market contributing to a spurt in prices as responsible for inflation, and decided to ban futures trading in wheat and rice as well.

An efficient and well-organised commodities futures market is generally acknowledged to be helpful in price discovery for sellers. Unlike the physical market like Mandis, a well-developed commodity futures market offsets the transaction in commodities without impacting the physical goods until the futures contract expires. Thus, a futures market encourages competition by attracting traders who hedge their bets and minimise risks on the basis of their own market information and price judgment. As a result, the commodity market attracts participation of hedgers who have a long-term perspective of the market, and traders, or arbitragers who hold an immediate view of the market.

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Even the Economic Survey had observed that “an effective architecture for regulation of trading and for ensuring transparency as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimise price shocks triggered by unanticipated supply demand mismatches”.

The Economic Survey said the growth in the volume of trading has been primarily propelled by Multi Commodity Exchange, Mumbai (MCX) and National Commodity Derivatives Exchange, Mumbai (NCDEX). As on December 31, 2006, gold, silver and copper recorded the highest volumes of trade in MCX, while in NCDEX, guar seed, chana and soy oil had the highest volumes of trade. Gold accounted for the largest share (31 per cent) of trade, followed by silver (19 per cent), guar seed (11 per cent) and chana (10 per cent). Clearly, the volumes of commodity futures in tur daal, urad daal, wheat and rice are insignificant and does not figure in the rising price scheme.