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Which of the following measures, generally invoked by the government, help contain price rise in certain food commodities? 1. Invoking Essential Commodities Act. 2. Zero export duty on those food crops. 3. Promoting futures and forward trading in those food commodities to stabilize food prices.

Which of the following measures, generally invoked by the government, help contain price rise in certain food commodities? 1. Invoking Essential Commodities Act. 2. Zero export duty on those food crops. 3. Promoting futures and forward trading in those food commodities to stabilize food prices. Correct Answer 1 only

The correct answer is 1 only.

Important Points

  • Invoking Essential Commodities Act against hoarding traders and stockist reduces hoarding and increases supply in the market thus reducing prices. So, statement 1 is correct.
  • Prices rise when production falls short of demand. Zero duty on exports would further reduce domestic supply. So, statement 2 is NOT correct.
  • Futures and forward trading in times of price rise further destabilizes food prices by speculation. The government recently suspended such trading in view of rising pulse prices. So, statement 3 is NOT correct.

Additional Information

  • Commodities markets have flourished wherever producers and consumers have to exchange goods.
  • This has happened for centuries; however, somewhere in this process, the agreements were signed by the parties where the delivery of a good was to be done in the future at a price which was decided in the present.
  • Hence, payment was done after receiving the commodity in the given quantity and at the specified quality at the price negotiated earlier.
  • This allowed the producers like a farmer to plant the crops with a guarantee that he would get a given price for the crop and it gave the customer security that he will get the requisite crop at the specified quantity and quality.
  • This removed the losses incurred by either party because of variations in the market.
  • So, a forward contract is a non-standardized agreement between two parties to buy or sell a commodity or an asset at a future date at the price decided now.
  • A futures contract is similar to the difference being that the assets bought or sold are standardized and the contracts are negotiated at a futures exchange that acts as an intermediary.

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