Derivatives

Agri commodities get a mixed deal in budget

Prerna Sharma | Updated on January 20, 2018

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No relief on CTT, but the unified agri market may be game-changing

Despite the considerable focus on the rural and agricultural sectors in the Budget, commodity market participants have been disappointed on a few fronts.

One major expectation was the removal of commodity transaction tax (CTT) which was introduced in July 2013, which hasn’t come about. Trading volumes on the bourses have dropped sharply in the last three years with the declines attributed to CTT, global commodity price declines and the NSEL crisis. Trading volume at the MCX has shrunk by a third in 2014-15 from its peak of ₹1.5 lakh crore in 2011-12. At the NCDEX, trading turnover has almost halved to ₹10 lakh crore in this period.

One also hoped that the Finance Minister would finally let financial institutions, including asset management companies, participate in commodity futures. This would have broadened commodity market participation and helped check market manipulation by unscrupulous traders. Companies exposed to commodity price risks would be able to devise better hedging strategies. Analysts were also expecting that following the merger of FMC with SEBI, new products such as options and indices would be introduced.

Good moves

While these proposals were missing in the Budget, Arun Jaitley has proposed several other measures that have direct and indirect implications for commodity markets in general, and agri commodities in particular.

Plans to allow higher foreign direct investments (FDI) in commodity exchanges will provide additional resources to exchanges for improving infrastructure and upgrading technology. A comprehensive crop insurance scheme will encourage farmers to take on more risk in cultivation and produce those commodities which are demanded by the market rather than being guided by support and procurement prices. That would help in aligning supply with emerging demand patterns.

A sudden and sharp rise in the prices of specific agri-commodities often leads to knee-jerk reactions in the form of bans on futures trading. That impedes participation in commodity futures market as such actions usually result in real or notional financial losses to traders. Rising prices of pulses in the last couple of quarters are a red flag in this context. Therefore, increased Budget allocation for production, import and buffer stocking of pulses is expected to stabilise the prices of pulses, and pre-empt such risks.

The most important Budget proposal is undoubtedly the announcement on creation of a common and unified national electronic market platform that will phase out the role of middle-men in the sale and purchase of agri-commodities in government-regulated APMC mandis. It is hoped this will bring buyers and sellers across the length and breadth of the country in direct contact with each other.

At present, India’s markets for agri commodities are fragmented. That leads to high prices in some parts of the country facing supply shortages of a specific commodity, while there are price declines in other regions that have excess supply. Speculators and black marketers exploit these situations at the cost of both consumers and farmers.

The creation of an interconnected and online marketplace will improve market transparency and lead to genuine price discovery in agri-commodity markets. That will reduce price volatility, bring in smaller market participants, increase trading volumes and make life difficult for market manipulators as it is markets with lower trading volumes that are prone to being manipulated.

The success of Karnataka in establishing a state-wide agricultural market by bringing in over 100 APMCs on a common platform gives the confidence that the idea of a common national market can work. Going forward, we may see substantially increased trading in agri commodities. No doubt, Budget 2016 is a big positive for agri-commodities. Removal of the CTT is another positive move that the government should consider for creating a vibrant commodity market.

The writer is Vice-President and Head Agriculture, Food and Retail at Biznomics Consulting

Published on March 06, 2016

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