EMERGING MARKETS REPORT
India may impose a ban on trading in food futures
By
Polya Lesova, MarketWatch
Last update: 4:01 p.m. EDT May 5, 2008
NEW YORK (MarketWatch) -- India is reportedly considering a ban on futures trading in food commodities, as the government struggles to curb soaring inflation and the rising cost of food has become a major international concern.
India's finance minister Palaniappan Chidambaram said Monday that he was considering a blanket ban on trading in food futures, according to a report in The Financial Times.
Chidambaram said that governments across Asia share his worries over speculation in the commodities markets, the FT reported.
India is "facing a very grave crisis on the food front," the minister said on the sidelines of the Asian Development Bank's annual meeting in Madrid, according to the FT.
India has already banned futures trading in rice and wheat. The latest remarks from India's finance minister come as his government confronts growing pressure at home to curb rising inflation.
On Friday, official data showed that India's inflation hit a 42-month high of 7.57% in the week ending April 19.
"It's indicative of the fact that there's a real issue here and governments are scrambling to find some kind of solution," said Cameron Brandt, global markets analyst at EPFR Global, about India's idea to ban trading in food futures.
"I don't think it's a great idea especially given that their food futures market is fairly modest," Brandt said. "If you take that away, you lose pretty important market signals. One thing the food futures market is telling us is plant more food."
Soaring prices for agricultural commodities, including rice, wheat, corn, and soybeans, have stirred popular discontent and demonstrations around the world. The United Nations World Food Program has said that high food prices are creating "a silent tsunami" threatening to plunge more than 100 million people on every continent into hunger.
Divya Reddy, an analyst at the Eurasia Group, said that banning futures trading won't curb soaring food prices.
The correlation between commodities trading speculation and rising food prices is "weak," Reddy said. Rather, the main drivers for food prices are poor harvests and growing demand.
"It's going to be more of a political gesture to show the public that they're taking measures," Reddy said. "India's in the middle of an election season, so the government wants to seem [like] they are doing as much as they can to address the issue."
India, which will hold parliamentary elections next year, has taken a number of measures in response to soaring food prices. Prime Minister Manmohan Singh's government has eliminated import tariffs on several commodities, including wheat, wheat flour and palm oil. It has also raised the minimum rice export tax in phases after initially banning all rice exports in October 2007. India has also tried to crack down on hoarding food.
"If the government creates such policy uncertainty that they can intervene whenever they want to, the incentive to invest will be reduced."
Arpitha Bykere, RGE Monitor
"The problem is that it [India] has tried different methods to control inflation," said Arpitha Bykere, an analyst at RGE Monitor. "Its options are decreasing."
However, banning futures trading only leads to policy uncertainty for both farmers and investors in commodities, she said.
"If the government creates such policy uncertainty that they can intervene whenever they want to [in the markets], the incentive to invest will be reduced," Bykere said. "This basically harms investor sentiment."
India's main commodity exchanges -- National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange of India (MCX) - have grown rapidly since they were established in 2003, according to the Eurasia Group. However, the de-listing of some commodities from the exchanges last year has caused a fall in agricultural futures trading. In 2004, agriculture made up almost 70% of total trade in India's commodity exchanges, but it has now dropped to less than 25%, with bullion and metals accounting for the rest, according to the Eurasia Group.
Services have driven India's impressive economic growth in recent years, even though they employ less than a third of the labor force. About two-thirds of India's 1.1 billion people depend on rural employment for their living. Rice, wheat, oilseed, cotton, tea, and sugarcane are among the country's main agricultural products.
"India's agriculture is hugely neglected," Bykere said. "Sixty percent of the population is employed by agriculture, but investment in agriculture has decreased over the past few years. If the country wants to grow, it has to improve rural infrastructure and agriculture investment."
