Will India's Futures trade fall prey to price gangs?

“You ban it, so that we can make money.” That is the mantra of price cartels working against Futures trade in India. If you thought Futures trade is the cause of price rise, think again and listen to Abhijit Sen panel.

In reality, who is afraid of the Futures trade in India. If you dig deep, you will find that a particular group of people who in normal case control the prices in different agri commodities across the country are behind the hullabaloo against Fututres trade.

The groups are at work at the main mandis in India. If it is pulses, there are groups in Akola and Mumbai who control the rates. Then in the case of gur, the cartel is in Muzaffarnagar and Hapur. Menthol’s price movements are decided by gangs in Chandausi whereas guar seed rates are fixed in Jodhpur. Then in the case of spices like pepper, there are people working overtime at Kochi and Kattappana in Kerala. Unjha in Gujarat houses cartels for jeera. Chilli rates are set by big guns in Guntur and Nizamabad, turmeric in Nizamabad and Sangli and soyoil in Indore.

These groups, rather gangs, command significant control on price determination of these commodities.

Following soaring prices, in 2007, the Forward markets Commission (FMC) had suspended Futures trade in wheat, rice, tur, urad, chana, soyoil, rubber and potato.

At that time there we big hue and cry over the negative impact of Futures trade on commodity prices. Following this, the Centre banned Futures trade in these commodities. Surprisingly, the prices did not come down even after the ban. In fact, in several cases, the prices moved up.

However, the controversy over the viability of Futures trade in India forced the government to appoint a committee to probe into the impact of Futures trade on commodity prices.

This has resulted in the appointment of Abhijit Sen Committee. The panel was appointed by the finance ministry on February 28, 2007 to study the impact of futures trading on price rise of essential commodities and suggest measures to improve farmers’ income.

The panel submitted its report on April 29 and the Centre. In its report, the committee was not able to establish that Futures trade caused spike in prices of farm commodities. However, it came to the conclusion that cartels in all agri commodities have been moving prices to their advantage.

The report said: “The greatest criticism of Futures trading has come from these trade interests. The kind of representations received by the government and the Forward Markets Commission testifies to this fear (of losing pricing power) among these groups.”

In a global view, India is not the only country which is forced to clamp a ban on Futures trade in several farm commodities.

In US also, the case is similar. Recently, the Commodity Futures Trading Commission (CFTC) of the US has started a probe into speculative activity in oil and cotton Futures.

While the Futures market in the US boasts of its experience and expertise, India’s Futures trade is novice as it resumed operations in 2003 after a 40-year gap.

Market participants are of the view that ban by the governments dampen sentiments and tend to ignore underlying fundamental factors like demand-supply mismatch that play a role in fuelling prices

The move to investigate Futures market in the US has also dented enthusiasm in the market.

India’s inflation rose to a 45-month high of 8.24 per cent in the week ended May 24, sharply higher than 5.15 per cent in the same week a year ago.

Inflation has risen sharply since the start of this year when it was pegged at 3.79 per cent in the first week of January.

Most of the price rise has been attributed to rising food prices, along with the surge in crude oil futures.

Commodity market players globally have noted that suspension of Futures trade is a negative move as there is no evidence linking it to the price rise.

Also, need for commodity Futures by traders is felt more when markets are volatile as there is a high need to mitigate price risks.

Pre-presidential election pressure on the regulator may lead it to take populist measures like imposing curbs on Futures trade and its participants. However, such moves will not bring prices down as they are not the cause behind the rise in prices, analysts said.

Again, CFTC may be under pressure to show that it is taking action against the sharp rise in commodity prices.

Over the last two weeks, the CFTC has been probing speculative activity in oil and cotton Futures trade amid talk of manipulation or fraud in the doubling of oil prices in the last year.

Also, the regulator is studying alleged irregularities into an unwarranted rise in cotton Futures prices in February-March, when surplus stocks were available in the market.

US lawmakers have exerted pressure on CFTC to crack down on speculators who they hold responsible for pushing energy prices to record levels.

CFTC is expected to start acquiring more information about index funds and, more significantly, about clients on the other side of the unregulated swaps deals that are being hedged on the regulated futures exchanges.

The move from the regulators comes in the wake of pressure from governments, policymakers, and consumers who have been hit the most by rising commodity prices, especially crude oil.