Stung by the severe criticism received from various quarters, the Indian government at first decided to ban futures trading in tur and urad.
When the ban in the pulses sector failed to drive down the inflation rate in the economy, the government, on the eve of Budget 2007, decided to implement a similar ban in the cereals sector, by suspending futures trading in rice and wheat.
The spot price of urad prior to the ban on futures trading was at Rs 3100-3200 per quintal and the current spot price of urad is at Rs 2700-2800.
Similarly, the spot prices of tur prior to and after the ban are at Rs 2200-2300 and Rs 2300 respectively.
Inflation in India is measured by the Wholesale Price Index. The Wholesale Price Index is an indicator of the average price movement over time of a fixed basket of goods and services.
Looking at the weightage of the commodities, which have been banned, in the Index, urad and tur constitutes only 0.23 percent; rice and wheat have a combined weightage of 3.82 per cent.
Hence, the four commodities, which have been banned, constitute only four per cent of the total index.
The most surprising fact is that other food articles like, jowar, bajra, moong, vegetables which are not available for futures trading have increased in price in the year 2006 as much as urad or tur or wheat.
The above composition of the Index clearly shows that food articles on which ban has been recently imposed constitute a very small position of the Index.
To demonstrate the fact that there are other factors causing the price increase, let us take the example of Wheat.
The total demand for Wheat averages around 72 million tonnes whereas the supply in the previous year was 69.5 million tonnes. This year the expected supply is around 72.5 million tonnes.
However, this will be subject to the vagaries of nature, especially rainfall. Last year, in order to meet the imbalance between demand and supply, the India government decided for the first time in six years to import wheat from Australia. That was one of the primary reasons for wheat prices going up.
Another reason for the spiraling price increase in wheat was the drastic reduction on the buffer stocks in wheat. Normally around 5 to 6 million tonnes of wheat stock are kept in buffer, but last year the buffer stock fell to 2 million tonnes.
The lack of government control is also another significant reason for wheat prices going up.
The government procures around 20 percent of total wheat produced in the country, which means effectively around 80 percent of the wheat is in private hands.
Hence, there is a huge scope for price manipulation by the private players. In order to curtail this, the government needs to increase its share in the procurement of wheat. Last year the government could procure only around 9.2 million tonnes.
Futures trading in commodities has not been the cause for price increase in food items in India.
Interestingly, there has been beneficial fallout of the ban. The government has imposed stock limits on hoarders. Moreover, the government has introduced zero duty import on wheat imports. This will ensure better supply in the markets.
The government has also decided to increase its public procurement of Wheat. It can be hoped that these measures will ultimately result in lower prices for food articles.
Ashok Mittal is Vice President and Country Head, Karvy Comtrade Limited