|Friday, 12 August 2016 04:33|
Futures aren’t the problem, they signal it coming
Nothing symbolizes India’s confused thinking on markets better than the fact that we have a 40% import duty on sugar along with a 20% duty on exports – does that mean we want to encourage imports or do we want to discourage exports? More likely, no one is really applying his/her mind – the import duty was put in April last year, and though the duty should have been reduced to zero in the face of an impending shortage, no one has thought about it. Instead, since bureaucrats don’t trust markets and politicians don’t know better, stock limits were put on sugar earlier this month and now the government wants to ban futures trading on grounds this is driving up prices. Sure, prices of sugar are going up, but that is because after two years of drought, production is down – by the time the sugar production year ends, India will have stocks of just 3 million tonnes or so, necessitating imports next year. Given global prices of sugar are higher than they are in India, not surprisingly, prices are trending up – even if traders are forced to liquidate all stocks and futures markets are banned, prices will still go up since, as compared to ex-mill prices of around Rs 38 per kg today, imports will cost Rs 52 after the 40% duty is imposed. While a simple understanding of how futures markets works makes it clear they cannot influence prices, the question politicians and bureaucrats must ask themselves is why prices of pulses are going through the roof when there is no futures trading in them – demand and supply, that’s why.
None of this is to say that markets can’t be rigged, but that applies to spot markets as well – traders can simply hoard until prices trend high enough. That is why regulators fix rules in such a manner so as to ensure no one can influence the market – position limits are set for precisely this reason – and then surveillance is done to ensure there is no collusion. Given that Sebi has found no collusion, it is indeed amazing the government should want to ban futures since well-functioning markets give enough advance warning so that appropriate action – like cutting import duties and placing import orders – can be taken. Indeed, were India to allow futures markets to function, farmers or farmer groups could also smoothen their incomes by participating in them. Indeed, the government doesn’t even allow spot markets to function and bans on agriculture have, by now, become par for the course. Just last month, a minimum export price of $360 per tonne was put on potatoes though the government doesn’t feel the need to step in and buy potatoes from farmers when their prices crash. Between 2007 and 2011, similarly, a ban was put on exports of wheat and common rice. Given how such bans, or minimum export prices, are not levied on industrial products, it is unfair to apply them to just agriculture, more so since successive governments keep professing their devotion to the farmers’ cause.