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Inflation in India is being contained by number of fiscal and monetary measures. During major part of last six decades Reserve Bank of India has always been following a tight money policies, issuing volume & rate based directives to contain credit expansion especially to the agricultural produce in the hands of the traders and intermediaries, including some of the processing industries that are closer to the consumer in the food chain. In the last decade large inflows of the capital into manufacturing and capital markets, which touched $ 40 Billion in FY 07, have made the task much complex, this problem being compounded by the absence of rupee convertibility. Reserve Bank is forced to buy US Dollar to stem the appreciating value of Indian rupee, ensuring an external value of rupee that  does not hurt the exporters and affect the trade balance. This move by the RBI has negates its objective and contributes to the money growth by increasing money supply. It is due to the  continuance of bank’s orientation, that evolved in tight money policy days characterized high deficits in the Indian budgets, the relatively high levels of statutory liquidity reserve requirement  and the dominance of the nationalized banks in the banking sector, the banks have always been reluctant lenders and have found comfort in maintaining higher than required percentage of government securities over and above the required 25% of the demand and time liabilities under statutory liquidity reserve. Currently they hold nearly 29% of the deposits in government securities. Thus over the years volume based curbs on credits and high deficits of Indian budget has not allowed the savings of the community to multiply the loans given to consumers of factors of production to self sustaining volumes that can propel growth. The present hike in the cash reserve ratio by the Reserve Bank of India is one of such measure which can only increase prices by putting down the volume of supply. The monetary or fiscal policies have not emphasized on increasing the supply volume to match the demand and rather have attempted to cool the prices through curbs and denials missing the opportunity to grow.

In their zeal to contain inflation the Government of India has initiated some good measures such as relief to importers of goods by lowering or abolishing the customs duties. But they have also banned the exports without increasing the domestic support prices depriving the farmers of higher prices that any way should have been their. Similarly they also banned the futures trading in chana, soya complex, rubber and potato. The last two measures will erode the margins of the farming community. The high farm input cost is already leading to lower application of the fertilizers hurting the country in lower productivity and depleting the soil of essential nutrients. In the absence of large scale program to support best cultivation practices depriving farmers of the price they would have got from the exports is akin to keep them always look forward to government sops to balance their long term household budgets by loan waivers.

Do commodity futures help the consumers the way stock or currency futures?

This is a difficult question to answer. One has to specify the time frame while outlining the link between the sharp rises in the commodity future prices and the underlying prices of the commodities. Futures do help various producers and other participants dealing commodities to even out the cyclical and short term uptrend in the prices by giving them a method to mitigate the price they otherwise would be carrying while having commitments to deliver or receive commodities in furthering the economic value they seek to add. The consumers would benefit as the sharp rises in the commodity prices do not affect the price at which goods are delivered to them. Such an activity also helps the economy, it enables the consumers to get protected from price fluctuations at the cost of maintaining the futures trading establishment. The farmers get to know the way the demand for their produce and therefore can also plan to benefit from the changing demand pattern of the society as reflected by the future exchange contracts and prices. They can also hedge their price. The futures market therefore will not affect the real transactions in the underlying commodities but help the participants to increase or decrease the supplies to the needs of the consumers. Banning futures will only come in the way of rational allocation capital in the economy affecting the supplies and therefore the prices cannot be controlled as the investment to increase supplies are not well directed.

India has not stepped by the investment in agriculture nor has made changes in the agricultural environment to increase capital invested. It is true that it has fed the present set of population with a gap of 40% of the estimated population left to live at less than a dollar a day. The task of managing the demands of large middle class when its consumption grows without causing upheavals in prices will be served right only if the systems such as futures are used in the right way. Banning is no solutions but increasing margins and taxing the profits can be a good way. Futures have a role to play in price determination.

What is the way out?

Banning futures market or trading dies not help. Countries need to isolate the reasons behind higher commodity prices and deal with them. We have number of reviews in Fingad that have talked of the crude oil price rise. In order to contain the crude oil price rise it is essential that the countries follow a growth model that reduces their reliance on imported oil. This would call for coordinated research and investments that do not affect the supply of food or other factors of production that we depend on to live.

The increase food price is a sensitive issue. This calls for basic question as to how there can be such disparity in consumption of food items in various countries. While there can be a short term curb in undesirable methods adopted to process food, in the long run their needs to be stepped up agriculture investments and research to increase productivity.

With the current knowledge of rice production it seems this food time that needs a faster substitute. The water required for per kg rice cultivation is 3, 450 liter) and wheat is 1, 450 liter. If we need water to increase other staple food items to replace these two probably we need to increase research efforts to recycle and reuse water apart from getting to perfect the methods to increase the productivity of other staple food items.

In short increased international cooperation is called for as this problem of inflation and deprivation of food to needy is of such scale that all countries need to act together to insulate growing number of deprived lot who need to be fed if all of us can live peace.