While it is normal for the financial markets to be a zero sum game, Budgets are expected to encourage all the constituents of the economy that contribute to growth and development. The Budget presented by the Finance Minister has laudable initiatives on aspects such as equity, inclusion, infrastructure development, and women empowerment, etc. However, it could be a major disappointment for the local enterprises, which are in pursuit of growth and global aspirations.


The introduction of Commodity Transaction Tax (CTT) comes as a dampener and disincentive for local enterprises in India. Whatever sops the Budget provided for SMEs may be nullified and perhaps reversed by taking away from them, the opportunity for cost effective hedging, international competitiveness and risk management. CTT may pose more challenges for SMEs, many of which are dependent on non-agricultural commodities as raw materials. Singling out non-agricultural commodities derivatives for CTT appears to be discriminatory as the Budget excludes other derivative segments that have higher trading volumes such as currency and fixed income derivatives from the tax net.

The transaction cost for a typical SME hedging on a futures market platform non-agricultural commodities, which at present is Rs 160 per crore will now become Rs 1,160. On an average the cost of hedging will rise by over 300 per cent. This will encourage the trade to shift to unregulated channels, or move to international markets for those which can afford, where the cost of hedging would be competitive. Alternatively, SMEs may simply keep away for protecting their business from risk.

Since prices of many non-agricultural commodities are set in international markets, Indian enterprises will be at a disadvantage in covering risks with cost-effective hedging that may expose them to global price volatility. Moreover, non-agricultural commodities derivatives market in India is designed, managed and developed into a global scale, entirely by local expertise and enterprise, which could be undermined by this sudden burden. Exchanges such as MCX that made India one among the top three countries in the world in commodities exchanges will be put to disadvantage, which could hinder its competitiveness against counterparts from China and Brazil racing to reach global dominance.

What will be the benefit that we could get from imposition of CTT? Nothing of meaningful substance to either the government, exchanges or enterprises except obliging to the undue demands of some stock exchange operators who are desperate to divert their deficiencies in developing a strong retail participation by hindering growth prospects of commodities futures markets. It would be interesting to watch whether the imposition of CTT will now bring back the retail investors to stock markets, as has been claimed.

Currency derivatives

Similarly, allowing FII trading in currency derivatives may also pose risks. With banks and financial institutions not yet permitted to trade, allowing FIIs that enjoy the benefit to cover other leg of exposure in respective international markets may undermine the power of local institutions in currency derivatives markets, which is more sensitive to the sovereign interests of the country.

The distortions in terms of dependence and volatility found in equity markets owing to excessive influence of FIIs may crop up in exchange traded currency derivatives market too.

As commodities futures trading is now brought on par with equity futures in regard to taxation, it is hoped that Government will move fast to legislate Forward Contracts Regulation Act (FCRA) that will pave way for further growth of commodities derivatives industry. Globally commodity exchanges are racing ahead with product innovation and diversification. It is the ingenuity and imagination of the Indian enterprise, which is able to reach global prominence in less than a decade by operating only one product of futures, which is allowed so far. It is important to nurture and encourage such spirit of growth that is so vital for harnessing India’s potential for growth, which the Finance Minister has rightly emphasised in his Budget speech.

The Government could have waited for some more time on CTT. In principle, no objection should be there for any tax, as long as it justified. The commodities community has been advocating and appealing to the Government to consider all aspects in a cohesive and comprehensive manner.

The Standing Council of Experts for the financial sector that the Finance Minister announced to examine aspects of international competitiveness, transaction costs etc., is an important step, which should be widely welcomed.

Tax aspects of all derivatives instruments, including commodities, currencies, interest rate, along with equities, could have been referred to this Council for a detailed study.

(The author is Vice-Chairman, MCX)

(This article was published on February 28, 2013)
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