India may have to suspend trading in more food futures as political pressure grows for action to tame inflation, Finance Minister Palaniappan Chidambaram said.
``If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,’’ Chidambaram said in an interview with Bloomberg Television in Madrid yesterday. ``The pressure is to suspend a few more food articles,’’ he said without identifying the products.
Communist allies of Prime Minister Manmohan Singh want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices and fanning inflation. India is joining China and Vietnam in tackling a global food crisis that has led to riots in Cameroon and the Ivory Coast, strikes in Argentina and anti-hoarding campaigns in Pakistan and the Philippines.
``A ban on futures will not have an impact on prices beyond a week,’’ said Sharad Joshi, a lawmaker and member of a panel set up by India’s government to study the impact of futures trading on staple foods. ``What the government needs to do is to take steps to boost supplies.’’
The government-appointed panel chaired by economist Abhijit Sen this month suggested maintaining the ban on futures trading in rice and wheat. It didn’t recommend extending the ban to other commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.
Wheat, Rice
India’s government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.
Domestic traders and producing and consuming companies are the main participants in India’s commodity exchanges, compared with the 13 million individuals who invest in stocks. Overseas funds aren’t allowed to trade in India’s commodity futures.
Chidambaram said that India may have to live with ``the current level of inflation for a few more weeks.’’
India’s inflation accelerated to 7.57 percent in the week ended April 19, the fastest pace in more than three years, as prices of food and manufactured products rose.
Spending Power
``If food prices continue to rise and demand is high, as it is in India today, then I am afraid we may have to live with the current level of inflation for a few more weeks,’’ he said. ``We thought inflation had peaked at about 7.3 percent. We were surprised that it moved up to 7.57 percent.’’
Singh, who lost ground in eight state elections since the beginning of January 2007, wants to cool inflation to bolster his Congress party’s chances of retaining power in national elections scheduled before May 2009. Inflation erodes the spending power of people, particularly in a country like India where the World Bank estimates half the 1.1 billion population live on less than $2 a day.
Singh last week said reining in inflation was the government’s top priority, informing business leaders not to expect an interest rate cut anytime soon.
The central bank unexpectedly ordered lenders to set aside more reserves on April 29, raising the cash reserve ratio to 8.25 percent from 8 percent, the highest since March 2001. While doing so, the bank also increased its inflation target to as much as 5.5 percent in the year to March 31, above its previous target of 5 percent.
`Tolerance’ Level
Chidambaram, who says the Indian economy’s ``tolerance’’ level of inflation is 4 percent, has in the past two months banned export of edible oils, rice and wheat, and cut levies on imports of edible oils, joining China, Malaysia and Thailand in taking steps to secure food supplies.
India also capped retail fuel prices and last week scrapped import duties on steel products including pig iron, hot-rolled coils, ferrous alloys and zinc and imposed an export tax on other steel products to augment local stocks.
The combination of higher interest rates and slowing exports may curb India’s growth to between 8 percent and 8.5 percent in the year to March 31, according to country’s central bank. India’s $912 billion economy, Asia’s third biggest, has expanded at a record average pace of 8.7 percent since 2003.
``It’s not the end of India’s growth story,’’ Chidambaram said. ``The moderation reflects world trend. It’s simply a pause and then we will run.’
