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NOTIONAL LOSSES
FUTURES TRADING
The inflation rate in India was last reported at 9.5 percent in March of 2012. From 1969 until 2010, the average inflation
rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of 11.31 percent in May of 1976.
The inflation rate in India as measured by the Wholesale Price Index (WPI) has been rising continuously over the past three years. Inflation in food products has driven overall inflation. As per the latest data, overall WPI Inflation stood a 9.5 per cent in at March 2012. In the week ending April 22, 2012, food inflation stood , at 9.9% per cent.
2007-08
2008-09
2009-10
5,114.15 10,061.25
5,017.80 9,939.60
5,124.75 10,084.45
4,988.00 9,749.30
.February 6.07% The increase in inflation was mainly driven by the steep increase in food inflation which jumped to 6.07% in February compared to -0.52% in January. Food Inflation stood at 9.54% in the same month last year. Potato and Onion prices were dropped by 43.13%, 2.22% and 48.50% respectively in February while prices of pulses, vegetables, protein items, milk, rice and cereals were increased by 7.91%, 1.52%, 20%, 11.7%, 1.53% and 1.71% respectively. Food inflation has 14.3% weight in the overall WPI. Prices of manufactured items, which have a weight of around 65% in the WPI basket, were increased by 5.75% in February. With this increase, inflation has again started its upward movement after some continuous fall. After this increase, RBI may not cut rates just now during its next policy review meeting scheduled to be held tomorrow.
March 9.94% While Food inflation stood at 9.94% in March compared to 6.07% in February, non-food manufactured inflation dropped to 4.87% in March compared to 5.7% in February. Food articles have 14.3% share in the WPI basket which has kept the overall inflation at nearly 7%.Onion prices were declined by 24.23% in March. Prices of protein items, pulses, vegetables, milk, potato, rice and cereal were increased by 17.71%, 10.05%, 30.57%, 12.59%, 11.6%, 4.73% and 4.41% respectively in the same month.
April 9.9% Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India to pause interest rate hikes despite global economic uncertainty and deceleration in industrial growth. Inflation has been very volatile and right now monsoons have triggered additional transportation problems for food products. Perishables are mostly generating the price spikes now. Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India to pause interest rate hikes despite global economic uncertainty and deceleration in industrial growth. Prices rose 9.9% for the week ended July 30 from a year ago, the highest rate of increase since the third week of April.
FALSE CLAIMS
Food demand in an economy like ours naturally grows over time. In order to keep pace with population growth, food production also needs to grow. However, in India, food production and availability have not grown commensurately. In 2008-09, annual per capita cereal availability in India was only around 165 kg, which was that of the same level as in 2000-01. In contrast, per capita cereal availability in China was over 290 kg in 2008-09, and in the US it was over 1000 kg. Moreover, per capita cereal availability in India fell to 161 kg in 2009-10, despite high GDP growth. Therefore food consumption for the entire population is certainly not witnessing any rise. What is happening is that income and consumption growth is getting disproportionately concentrated within the top 10 to 15 per cent of the population, who are benefiting from GDP growth. For the bulk of the Indian people, consumption levels are getting further squeezed. If 77 per cent of the Indian population is spending less than Rs 20 per head a day as per the Arjun Sengupta commission report, one can well imagine what the consumption levels of the majority of Indians are. Widespread hunger and malnutrition is the reality of India. India continues to be home to around 25 per cent of the worlds hungry population currently estimated at 925 million by the UN World Food Programme. Nearly half of Indias children under three years of age continue to remain malnourished, as per the National Family Health Survey, alongside half of pregnant mothers who are anemic. Food price inflation is making matters worse for these sections by squeezing their consumption levels.
Secondly, the growing penetration of big corporates in the food economy, international trade in food items and speculative futures trading in agricultural commodities has weakened the governments capacity to control food prices. The share of corporate retail in food distribution has tripled over the past four years. The government has manipulated trade policies to allow big traders to make huge profits through export and import of essential food items like wheat, sugar and onions. On the other hand, the PDS has been weakened considerably through targeting. In most states, the role of the ration shops, state agencies like the NAFED etc and consumer cooperatives in food distribution, has been whittled down. Therefore, the profit margins of private traders have also increased, reflected in growing gaps between wholesale and retail prices as well as farm-gate and wholesale prices.
There are medium and long-term reasons too. Our agriculture is in a crisis. We are not producing enough to meet the needs of a growing population. The peasantry continues to be in distress, with 2.5 lakh farmers committing suicide over the past 15 years. State intervention in raising agricultural productivity has been weakened. The government is more interested in handing over this role to big agribusinesses and retail giants like Walmart and Monsanto in the name of a second green revolution. That will further marginalise the small peasants.
Finally, the cuts in subsidies and price hikes of inputs like diesel and fertilizer are also contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the recent weeks.
NOTIONAL LOSSES
The so-called under-recoveries of oil companies cited by the government are notional losses. In actual terms the oil companies are not making such losses. The international crude oil price is currently ranging between 85 to 90 dollars per barrel, which comes to around Rs 25 per litre (1 barrel = 159 litres and 1 dollar = 45 rupees). However, the retail price of petroleum ranges between Rs 58 to Rs 63 per litre in the metro cities. This huge difference between crude oil prices and the retail price of petrol is on account of taxes, over Rs 30 per litre of which is collected by the central government through customs and excise duties. If we take these taxes into account, the government earns much more in taxes on petrol and diesel than it spends on fuel subsidies. If the government cuts these indirect taxes, the fuel prices would not rise. The government does not want to cut these taxes, because otherwise it has to impose more direct taxes on the rich and the corporates. Therefore the government is passing the burden on to the people. After petrol prices were deregulated in June 2010, petrol prices have been raised seven times by the oil companies, the last time being in January 2011, amounting to an increase of over Rs 10 per litre in seven months. Increase in fuel prices have been adding to inflationary pressures.
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FUTURES TRADING
Futures trading is linked to inflationary expectations in the economy. Futures are contracts made between sellers and buyers for sale/ purchase of a fixed quantity of a commodity at a fixed price at a future date. What commodity futures markets do is to enable selling and buying of these contracts on a daily basis, like in the stock market. So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs 30 per kg, can sell at more or less than Rs 30 per kg in January 2011. Someone, for example, buys the contract at Rs 29 per kg today, because sugar prices are expected to fall in the coming months. However, in the coming months international sugar prices can rise, may be because the sugar crop from, say Brazil, fails this year. Then demand for sugar contracts in Indian futures market will also rise and the person who bought sugar at Rs 29 per kg can sell it in March 2011 at, say Rs 35 per kg, making a windfall profit of Rs 6 per kg without having to either produce or consume a single grain of sugar. Moreover, when sugar prices rise in the futures market in India, sugar traders expect to make profits (a) by exporting sugar abroad (b) by hoarding sugar so that there is scarcity in the domestic market, which eventually increases domestic sugar prices. The commodity futures markets therefore achieve two things. First, they link domestic food prices to the volatile international commodity markets. Second, they provide avenues for pure speculators, who have nothing to do either with production or trade in food, to emerge as major players and make capital gains by speculating on food prices. With the advent of multi-commodity exchanges in India since 2002-03 and the commencement of online trading, commodity futures trading have grown manifold. Like most countries across the world, the people who are investing in these markets are not farmers, but big players of the financial markets who are only interested in making speculative gains. The government was forced to suspend futures trading in some essential commodities like rice, wheat, sugar and some pulses in 2007 due to the pressure from the Left Parties. However, futures trading in wheat and sugar have once again been allowed by the government. India is a food deficient country. Our productivity levels are low and we are not producing enough to meet the demands of a growing population. Moreover, our agricultural production is heavily dependent on the weather and above or below normal rainfall (floods and drought), significantly affects the supply of agricultural commodities. Storage capacity in India is also limited and many food items cannot be stored because of lack of modern storage facilities. In this backdrop, futures trading in food items distort the price signals and encourage speculation and hoarding, thus contributing to food inflation. Therefore, in order to control food inflation, futures trading in food articles need to be prohibited.
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Rice Wheat Atta Chana Dal Arhar Dal Moong Dal Masoor Dal Sugar Milk (Rs./litre) Groundnut Oil Mustard Oil Vanaspati Tea Loose Salt Pack (Iodized) Potato Onion
22 13 14 35 50 45 62 23 21 109 77 54 144 11 8 21
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