While the government loses no opportunity in expressing its discomfiture over futures trading through the recognised commodity exchanges, wrongly holding it responsible for the price rise in many commodities, it is letting the same kind of trading flourish through parallel, unlawful channels. What is known in trade parlance as 'dabba' trading (the unregulated, and in fact illegal, futures trading that takes place through informal transactions, with settlement outside the exchanges at the prices quoted on the exchanges) is gaining in volume by the day. According to a rough reckoning (in the absence of verifiable records), transactions worth Rs 12,000 crore are said to take place every day through 'dabba' trading in commodities like soyabean, gur, mentha oil and guar seed. This business has got a fresh shot in the arm because of ill-considered moves by the government, including the proposal to impose a stiff commodities transaction tax (CTT) and letting lapse the ordinance amending the Forward Contracts (regulation) Act. While the CTT proposal has raised fears about a substantial increase in the transaction costs for futures deals, the latter move has deprived the Forward Markets Commission (FMC) of the power which it got for a short while during the life of the ordinance, to act against 'dabba' traders, many of whom happen to be the members of the recognised exchanges as well. By by-passing the regulated exchanges, the 'dabba' traders save on several charges and levies, including margin money and the service tax, which would otherwise impinge on their profits by hiking transaction costs, especially for day traders and hedgers. If the CTT does come into force, substantial business is almost certain to get diverted to either exchanges abroad or to 'dabba' trading. Already, many commodity houses have moved over to foreign commodity exchanges for hedging, resulting in an estimated 20 to 25 per cent drop in the traded turnover of the major domestic exchanges.
What exposes the government's double standards on futures trading is the fact that, while it has barred local wheat traders from dealing on domestic exchanges, its own agencies have taken positions, on behalf of the government, on the Chicago Board of Trade (C-Bot), through call options for buying wheat at a future date. The intention, predictably, is to hedge price risks in case the government needs to import wheat, should there be inadequate procurement in the on-going rabi marketing season. Options trading in commodities is not yet allowed in India, though the now lapsed ordinance had provisions for its introduction on the domestic exchanges.
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The real need today is to streamline futures trading, especially in agricultural commodities, and not ban it or leave the field open for illicit and unregulated trading to flourish. Though there is no point in speculating at this stage about what the Abhijit Sen committee will finally say in its long-awaited report, about the impact of futures trading on prices, it has already become clear that the price surge of recent months had nothing to do with futures trading, as the uptrend continued even after such trading was banned in several commodities. It would be advisable, therefore, for the government to either re-issue the ordinance that has lapsed, or bring a new Bill to amend the forward markets law and facilitate the growth of transparent trading in commodities.
