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Two events in the month of July, 2013 reshaped the destiny of the commodity derivatives market in India. The month started with the imposition of commodity transaction tax or CTT on non-agricultural commodities, and ended with the suspension of trading at the National Spot Exchange Limited (NSEL), an exchange which used to provide shorter period derivative contracts in commodities.
Within a month, a thriving and rapidly growing commodities futures market was effectively throttled. If levying of CTT was an effort to bring parity between two regulated forms of trading — equity and commodity — then suspension of trading at NSEL was an effort to bring an end to unregulated trade. Technically speaking, these two actions were different in nature, but together, they brought down the flourishing commodity derivatives market to a low of Rs 2.36 lakh crore during the first fortnight of April, from Rs 7.09 lakh crore during the second fortnight of June, 2013.
If the issue was parity, then why have currency derivatives been kept out from the purview of transaction tax, despite this market being 4-5 times bigger than the commodity derivatives market? Similarly, the transaction tax on Gold Exchange Traded Funds (available on stock exchanges) is Re 1 per lakh of transaction value, while Gold Futures on Commodity Exchanges attract a tax of Rs 10 per lakh of transaction value.
This massive fall is going to take a toll on jobs within the commodities ecosystem. There is no official figure, but estimates are that this industry has created 10 lakh jobs in procurement, storage and transport, etc., which are under threat. The crackdown on NSEL was justified, but the real issue is that when trading was permitted way back in 2008, why was it not brought under any regulator? Both spot and future trading in equity is regulated by SEBI. If the Forward Markets Commission is there for commodity markets, then why was online spot trading left unregulated?
Now, it is up to the new Government to revive this sector. It needs to put amendments to the Forward Contract Regulation Act (FCRA) on priority which will allow newer products besides participation by banks and foreign investors in commodity markets. And it should axe the CTT.
Sishir Sinha, Deputy Editor
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