The Hindu Business Line : Commodity futures face biggest policy risk

Commodity futures market faces the biggest policy risk of recent years after the Left party leaders met the Prime Minister on Friday to press for fresh measures to contain inflation. Unabated strength in prices of many essential food products and non-food items such as fuel (and to a lesser extent metals) is surely burning a hole in the pockets of a very large number of people.

The poor are particularly vulnerable to high food prices. As food costs account for a major share of family budget, high priced food would inevitably lead to a compression in consumption demand which in turn will have adverse consequences on nutrition and health.

On the other hand, the market participants – traders, processors and speculators – especially those in sensitive agricultural markets, are rather nervous about the prospect of some precipitate action by the Government following mounting pressure from political allies and the Opposition.

The three important demands the Left leaders made included a ban on futures trading in 25 commodities, universalisation of public distribution system in addition to including edible oil and pulses in ration shop supplies, and revamp of the petroleum products tax structure (read, reduction in excise and customs duties).

Will the PM concede these demands? Obviously, he will have to examine the political, financial, strategic and electoral dimensions of the recommendations. He would perhaps want to be seen as accommodative but surely not one to buckle under pressure and concede every demand of the Left.

In terms of ease of implementation, revenue implication and impact on market prices the significance of the three recommendations would vary. There is belief that within the Government itself, there is no unanimity of views among key ministries.

Given known political compulsions, the easiest demand to concede would be the ban on futures trading in sensitive commodities. Whether or not such a step will have a sobering influence on open market prices is a different matter altogether. But it would signal that the Prime Minister does not take the Left lightly. So, on the face of it, the country’s commodity futures market does run a big downside risk in terms of a reversal of policy.

It would of course be a tragedy if the Government believes conceding the Left demand of a ban is the end of the problem. Inflation, food shortage and growing dependence on imports are problems that would refuse to go away soon. We need specific time bound action to address these issues. Every dark cloud has a silver lining. The present crisis would have served a great purpose if it shakes up the establishment and forces reconsideration of policy priorities, especially farm policies. Simply put, strengthen the real economy; and the rest will take care of itself.

As for universalisation of PDS, there would surely be financial implication in terms of ballooning food subsidy. Attention should be paid to ways and means of finding the money for an extended PDS. Inclusion of edible oil and pulses in PDS supplies would of course make a big difference to those who are covered at present.

Improved access to food at affordable prices is the safety net the poor need at present.

Because rice, wheat, sugar, pulses and edible oil together have a higher weightage in the consumer price index, large-scale supplies through universalised PDS would dent the strength of open market prices. This would be both politically expedient and socially desirable.

While the Union Government will have to ensure uninterrupted supplies of foods under PDS, the State governments have a critical role to play in ensuring such supplies reach the intended beneficiaries. Governance is the key. States will have to devise plans to deliver PDS supplies without leakages.

Globally, fuel prices are unlikely to move down in a hurry. Rising crude market poses a threat to prices in our internal market. Far from reducing fuel prices, we may soon reach a situation of having to remain content with keeping fuel prices unchanged from the present levels. This may be possible only if taxes on products are reduced or rationalised.

The next few days will unfold what is in store for the country.

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Commodity futures face biggest policy risk