May 26, 2009 is a significant day for futures trading in
agricultural commodities in India. On that day, the
commodity markets regulator, the Forwards
Market Commission (FMC) suspended trading in sugar futures, contrary
to the expectations of further liberalization, considering that
the government had recently lifted the two-year ban on wheat
futures. FMC has suspended launch of new sugar futures contracts
till December 31, 2009. It has also has also forbidden traders
from opening new positions in existing contracts. Earlier, in the months
of January and February 2007, the government had suspended
futures trading in four commodities: wheat, rice, urad and tur. Subsequently, on May 2008, the FMC announced suspension
of futures trading in four commodities: chana, soy oil, potato and rubber.
Commodity futures market provides a platform for farmers,
traders, exporters and other corporates to hedge their positions. At the
same time, speculators provide liquidity in the market with their
trading and their active participation provides a room for better
price discovery. Suspension of trade in this market means taking
away these benefits. The reason quoted by the government behind
this move is to arrest the price rise due to the possible
speculative activities. This move has come, especially, when the newly
formed Congress led UPA government was expected to focus on
continuation of economic reforms in general and to remove the earlier bans
on commodities like wheat. This initiative by the government
has received criticism from various corners. Rogers, author of the
best-known books like Hot Commodities and A Bull in China, criticized the action of the government by saying that suspension
of commodity futures trade is unexpected from a country, like
India, which is proud of being a great destination for global
investments and which desires to march ahead on the path of economic reforms.
Moreover, there is a difference in the circumstances in
the case of ban on futures in wheat, rice, etc., and the current
ban on sugar futures. The earlier ban on futures trading was due to
the continuous pressure from the Left parties and the double digit inflation figures. But, now with
the Congress gaining a majority, there is no such pressure from other political
parties and the government can take its own decisions.
So, is the new government acting against the
market expectations? Or, is this decision influenced by any political pressure?
Or, is this move genuine and is driven by the expected increase in sugar price due to the mismatch between demand
and supply factors, which in turn may lead to possible speculative activities? |
