The Hindu Business Line : War on the commodities markets

About six months ago, the cries over rising prices started getting shrill. The UPA Government found itself in a spot. It was difficult for the knowledgeable Members of Parliament from the Congress Party to explain the high tide of inflation. The euphoria caused by claims of high rates of GDP growth started diminishing rapidly.

Even the Left allies mounted an attack on the treasury benches that was clearly embarrassing on the eve of the discussion on the Indo-US nuclear treaty. The Manmohan Singh government did exactly what every government since Independence has done when faced with a situation of shortages and rising prices. Are the prices of edible oil going up? Import it; if necessary, reduce the import tariff on it. If the farmers get discouraged and react by actually reducing production, so much the worse for the farmers and the future government that might be called upon to face the music. Are food prices going up? Ban the export of rice, corn, milk powder and what not. If depressed domestic prices make farmers unhappy, that is a problem for the day after; the important thing is to save the situation now.

Is the rise in prices significant in commodities that are traded on the futures market? Ban the futures markets. The markets are bad per se and futures markets are the dens of gamblers. That is a good slogan to appease the ‘aam aadmi’ who is looking for a scapegoat for the rising inflation.

No real link

What does it matter that a Committee appointed by the UPA government itself had come to the conclusion that there was no causal link between the working of the futures markets and the rise in prices or even the volatility of prices?

The Government had earlier banned the futures trading in pulses, wheat and rice. It now proceeded to ban the trading of potato, rubber, refined soya oil and channa. The remarkable thing is that the ban on trading in potato and rubber came at a time when potato producers and rubber planters were desperate and even on warpath because of the depressed market conditions. The Government further made its intentions clear by imposing a terrible commodity transaction tax (CTT) on the futures market of Rs 17 per Rs 1 lakh.

Understandably, the trading in the commodity exchanges started declining. It became quite clear that the Government was determined to suppress all futures trading in agricultural commodities. The UPA Government was never happy about the fact that futures marketing was resuscitated by the NDA government from the state of coma that the earlier regime had succeeded in reducing it to.

What does it matter if experts gave the futures market a clean chit? In politics, a handful of experts don’t count, what counts is the swell of mass opinion.

The Finance Minister, Mr P. Chidambaram, found it convenient to make a statement on May 4, 2008 that if popular opinion was against the futures market, the Government could not be oblivious to that fact.

No CTT anywhere else

The Finance Minister made this policy statement in Madrid, when both Houses of Parliament were in session. The statement clearly constituted a statement of policy made outside Parliament. It was, clearly, a breach of privilege. The Finance Minister succeeded in getting a motion for breach of privilege scuttled.

Further, on May 30, 2008, while replying to debate on the Finance Bill 2008-09, he brushed aside the criticism on the CTT, claiming that the CTT existed in many countries in the world and that the CTT was very much like the STT on stock market transactions.

The leaders of the farmers in Parliament would not take this lying down. They went to the trouble of contacting all the commodity exchanges across the world and obtaining replies in writing if anything like the commodity transaction tax or any levy of that character existed there.

The conclusion was that the only case where something like a commodity transaction tax existed was in tiny Taiwan.

Even there, CTT exists only in respect of gold traded on TAIFEX, a stocks and derivatives exchange platform. And the rate of CTT there is only about 25ps per Rs 1 lakh, against Rs 17 per Rs 1 lakh that the Finance Minister was defending.

It should be noted here that there is no transaction tax in India on gold exchange traded funds (ETFs), which are traded on the stock exchange platform.

Surprisingly, the situation in India is that the transactions in gold traded on the futures market will be subject to CTT, though the CTFs would be free of all taxes.

The world’s top 25 commodity derivatives exchanges that record 99.99 per cent of the total volume of all commodity exchanges do not levy a CTT. The taxes imposed in some of the European countries are in the nature of a Value Added Tax (VAT) on services rendered by the markets.

Soon after being sworn in as a Prime Minister, Dr Manmohan Singh had articulated his vision of “creation of a single market across the country for both manufactured and agricultural produce.”

How does that go with a Finance Minister who tries to snuffle out the futures markets, defies Parliament by making a policy statement in far away Madrid when the House was in session and gives Parliament incorrect information on the situation of futures markets worldwide?

The Prime Minister does not have even the pretext of the ‘coalition dharma’ to justify the departure from his vision statement. The anti-market parties are off his back now. It is time he listened to his inner voice.

(The author is Founder, Shetkari Sanghatana, and Member of Parliament (Rajya Sabha). blfeedback@thehindu.co.in)

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