The Hindu Business Line : Futures trading not main cause for inflation, says Montek

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Futures trading not main cause for inflation, says Montek

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New Delhi, April 22 Commodity futures trading is not the main cause for price rise and inflation in the economy, according to the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia.

“I don’t support the notion that futures market creates inflation. We should not look at banning futures trading as this market plays an extremely important role in price discovery. Banning futures trading will be contrary to real economic rationale,” Mr Ahluwalia told reporters on the sidelines of an IIEF-NIPFP policy roundtable on ‘Taxation of Transactions’ here today.

This stance is at variance with that of the Left and other parties that had demanded a blanket ban on futures trading in essential commodities as it was inflationary.

Under commodity futures trading, participants trade on futures contracts to hedge their risks against adverse price movements. A futures contract is an agreement between two parties to buy and sell a specified quantity of an asset at a future date at an agreed price.

On the draft recommendations of the Abhijit Sen Panel, which is studying the entire issue, Mr Ahluwalia said that he had not seen the draft report as yet, but noted that the Panel was set to recommend that the existing ban on futures trading in certain items should not be lifted. “I am told they are going to say that don’t lift what has been banned.”

The Abhijit Sen Panel is also understood to have noted that prices in certain commodities have gone up, despite a ban on their futures, on account of surge in their global prices.

Mr Ahluwalia said that he wants to see if the Panel report has commented on whether the futures market is being manipulated or not. “In the long term, we have to ensure that our futures market is well regulated. There should be no manipulation. I want to see what the report has said about this..,” he told reporters.

On the demand of commodity exchanges that the proposed commodities transaction tax (CTT) be withdrawn as it would lead to shifting of the market offshore, Mr Ahluwalia suggested that industry should look at recommending a “non-distortionary tax” to the Finance Ministry that could ensure the same level of anticipated revenues for the Government.

"If your (commodity exchanges) argument is getting rid of CTT will help retain futures market within the country, then you must recommend a revenue neutral tax that would bring in same level of resources. It could be a specific surcharge on the general income tax paid by taxpayers. The intention of introducing CTT is not to discourage activity. It brings revenue" Mr Ahluwalia said.

The Deputy Chairman said that transaction taxes like securities transaction tax (STT) and CTT are bad ideas. "My view has been that transaction taxes are bad idea," he said.

For Indian futures market to grow, Mr Ahluwalia underscored the need to harmonise Indian tax treatment with those abroad.

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