These days, there is a wrong notion spread among political parties, farmers and trading circles that futures trading in commodities is the root cause of inflation.

That is indeed a wrong notion. Futures trading in commodities has not been the cause for price increase in food items in India. And any ban on futures trading is not a realistic measure to prevent inflation, because the price movement of a commodity is based on the demand and supply system. That means, where supply is lower, the deficit can be filled through imports. Reduction of duties is the best practice to encourage imports.

In India, inflation is measured by the Wholesale Price Index. The Wholesale Price Index is an indicator of the average price movement over time of a fixed basket of goods and services.

According to the Reserve Bank of India, inflation movements in 2006-07 have been driven by primary food articles and manufactured products prices.

Among the major groups, prices of primary articles led by wheat, pulses, fruits, milk and oilseeds posed upward pressures on inflation. The RBI report says wheat prices have remained firm on the back of low stocks and high international prices. That means, price rise is mainly because of the low reserve and higher international prices.

Domestic wheat stocks were 6.0 million tonnes as on November 1, 2006 as against the buffer stock norm of 11 million tonnes. On a year-on-year basis, wheat prices have increased by 14.7 per cent as on January 13, 2007 (global wheat prices, as noted earlier, increased by about 24 per cent, y-o-y, in December 2006).

Prices of pulses also edged higher (25.4 per cent) from last year's level, reflecting stagnant domestic production as well as higher demand. Fruits and milk prices have increased by 12.0 per cent and 7.6 per cent, respectively. Prices of oilseeds witnessed a sharp turnaround - an increase of 21.0 per cent, y-o-y, as against a decline of 11.9 per cent a year ago - which could be attributed to lower domestic production as well as firm global prices.

The weighted contribution of WPI included 22 percent for primary article like pulses, wheat, rice and vegetables, 14.2 percent for fuel, power, light and lubricants and 63.80 percent for manufactured products.

In the WPI inflation chart, the banned commodities are included in the primary articles, which is only 22 percent of the total components.

The weightage of the commodities - wheat and rice - which have been banned has a combined weightage of 3.8 percent. But earlier banned commodities - Urad and Tur - have a combined weightage below 0.6 percent.

I think the Budget presented by Finance Minister P Chidambaram would improve the output of pulses and cereals as he has introduced a special package for them. In his Budget, Chidambaram has chalked out a 'Mission for Pulses' -- an integrated oil seeds, oil palm, pulses and maize development programme -- to be expanded with sharper focus on scaling up the production of breeder, foundation and certified seeds.

This new plan from Chidambaram will definitely help in future to improve the output of pulses and cereals.

If we consider the agriculture side - India is a country two-third of whose population depends on agricultural commodities - the relevance of commodity futures trading is very high in the Indian context.

The beneficiaries of future trading in agriculture commodities are the farmers in India. They can hedge their products in the futures market and avoid the unexpected fluctuations due to the adverse climatic conditions and crop damages.

I would also like to appreciate the initiatives taken by the national commodity exchanges to display spot and future prices through post offices to make farmers aware about the current market prices. This would benefit farmers to know about the commodity futures trading and take advantage of it.

Therefore, I strongly believe that there is no need to abort commodity futures trading to prevent soaring inflation. The need of the hour is to implement measures like introducing stock limits, zero duty import, public procurement, etc.

Consider the case of wheat. It was simply the lack of government control that has led to a surge in wheat prices. The government procures only around 20 percent of the total wheat produced in the country and the remaining 80 percent of wheat is in private hands.

Giby Mathew is Managing Director, JRG Wealth Management Ltd, a leading commodity brokerage house in India.