The Abhijit Sen Committee on futures trading was set up in March 2007 and asked to give its recommendations within 90 days. It is proof of how the issue of futures trading is politicised that the committee took over a year to restate what standard economic theory would say is obvious. Futures trading in commodity prices does not create inflation. Okay, so we have government committee saying it. So, will everyone accept it? Probably not. The assumption that futures trading causes inflation is based on the fallacy that a futures trader has some means to lock up a commodity out of the public eye that he only releases when prices are high. No such thing happens. The futures market is simply a place where a rise in price expectations is matched by a drop in someone else?s expectations. But the committee came under fire because of what was politically seen as the government?s inability to contain the rising prices of food items. Even before the report came in, the government has been under pressure from Left parties to impose curbs on futures trading. The committee, much to the discomfiture of the government, could not find any evidence of futures trading influencing prices of commodities. It found little evidence to suggest any links between market price rise and volatility that could be directly linked to the functioning of futures markets. Instead, it has recommended the inclusion of more commodities within the futures trading ambit. However, with elections only months away, will the government take the political risk of not banning futures trading? Interestingly, since the report was submitted, the Left parties have been silent on the issue.
So, as before, it will come down to political pulse-taking, and what should be a simple decision that the government should not have to spend any time over, will end up consuming much administrative energy. In many ways, this is like the issue of high interest rates in India. Some people have been clamouring for higher rates to contain inflation. They got what they wanted, but inflation is still rising, irrespective. They will never be satisfied, and there?s enough proof to assert this. So, we will keep on debating futures trading every time the WPI rises, and forget about it when prices are somnolent. This is no way to run policy. But that?s politics in India for you.
