BL: Chidambaram Says India May Suspend Some Food Futures (Update1)
By Cherian Thomas and Naga Munchetty
May 4 (Bloomberg) -- India may have to suspend trading in some food futures to arrest inflation if parliament calls for it, 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 in Madrid.
Prime Minister Manmohan Singh's communist allies want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices and fanning inflation. The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities.
``The pressure is to suspend a few more food articles,'' Chidambaram said without identifying the products. ``It may be politically wise to do that for a short period to see if it has any impact at all on inflation.''
A panel formed by the government under economist Abhijit Sen to study the impact of futures trading on prices of staple foods, this month suggested maintaining the ban on 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.
A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. Online trading in commodity futures in India started in 2003.
`A Few More Weeks'
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.
``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.
Top Priority
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.
Chidambaram, who says the ``tolerance'' level of inflation in India 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.
Price Caps
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.''
To contact the reporter on this story: Cherian Thomas in Madrid at cthomas1@bloomberg.net. Naga Munchetty in Madrid at nmunchetty@bloomberg.net.
Last Updated: May 4, 2008 10:01 EDT
AI
