The Hindu Business Line : Trial balloons

If trading in futures is banned in more commodities, businesses need to know why; what they don’t need is ‘unofficial’ announcements that have consequences.

Ministers and bureaucrats need to exercise some restraint in making public statements about possible changes in policy as they can have serious implications for businesses. Increasingly, much more than officially announced policy decisions, such pronouncements (usually construed as the government’s final decision pending a formal announcement) are seen influencing or hurting the market. The latest is the Finance Minister, Mr P. Chidambaram’s reported interview in Madrid, where he mentioned that futures trading in more food commodities may be suspended because of political pressure. This is seen as a threat to futures trading in sensitive items such as vegetable oil and sugar. Trading in wheat, rice and select pulses (urad and tur) was suspended last year. Alarmed by the prospect of more commodities being delisted, market participants are exiting in a hurry — surely not a healthy sign for orderly derivatives trading. But the Finance Minister is not alone in making such statements.

The Agriculture Minister, Mr Sharad Pawar, on more than one occasion, has publicly announced India’s intention to import large quantities of food products through government agencies. The domestic market may not take such public statements seriously; but overseas suppliers do. They immediately jack up prices in anticipation of India’s purchases. For nearly a year now, the government has been facing political risk, which often means policy risk for commodity-related businesses. Export bans, storage control, fiscal levies and the like have been imposed on commodity trade. Uncertainty in the commodity universe is high; and, unfortunately for the industry and trade, risk management has taken precedence over business promotion. Now, businesses have to reckon with even newer risks in the form of pronouncements that do not have the force of law, but still reflect the official line of thinking.

It is an entirely different issue whether futures trading in more commodities should be prohibited. The policymakers must apply the same set of criteria that led to delisting of select foodgrains last year — it is important to point out that the government did not spell them out then. Businesses have a right to know; and the government’s decisions must be fully explained. Incidentally, there are differences between 2007 and 2008. For instance, we continue to remain surplus in sugar, and deficit in edible oils. Wheat was in short supply last season, but current conditions are far from worrisome. The government claims there will be a record food-grains crop — over 217 million tonnes of wheat and a record 95.7 million tonnes of rice. If any precipitate action is taken (say, suspension of derivatives trading), the government is duty-bound to explain the rationale behind it. Often, government notifications state they are “issued in public interest”. It is time the industry demanded from the government an explanation as to how indeed the decisions are in the public interest.

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