Commodity Analysis

Sowing hope for the farming sector

V Shunmugam | Updated on February 04, 2018 Published on February 04, 2018

The Budget has a slew of measures aimed at helping rural India

 

The focus of this year’s Budget was primarily on agriculture, healthcare, infrastructure, rural economy and overall ease of living. Agriculture has received much-deserved attention, which has been long overdue.

Spotlight on Agri

The MSP (minimum support price) should set the floor for market prices but farmers often don’t get remunerative prices for their produce. The announcement that the MSP shall be 50 per cent higher than the cost of crop production should provide sufficient mark-up for incentivising farmers.

Expanding the coverage of eNAM, upgrading rural haats to Gramin Agricultural Markets (GrAMs), doubling of allocation to food processing and launch of ‘OperationGreens’ for perishable vegetable crops are some of the other important measures that can be positive for the sector. Providing 100 per cent tax breaks to farmer producer companies (FPOs) with annual turnover up to ₹100 crore for five years will promote creation and use of the FPO mechanism to aggregate their needs of inputs, farm services, processing and marketing, enabling their members to reap large economies of scale.

Commodity markets

The commodity markets have lots to cheer from the Budget. The focus on agriculture and rural infrastructure, including the launch of GrAMs and setting up of testing facilities, will boost value-addition and enhance marketing and price realisation by the farmers.

For instance, as envisioned by the Finance Minister, the derivatives market institutions can be leveraged to boost exports of agri-commodities that is visible already in the case of mentha oil. Leaving aside the research that can vouch for the same, each of the mentha farmers can tell the story of how commodity derivative markets and access to market information, besides quality testing, had improved not only their income but also their investment in improving the productivity of their mentha crop.

Similarly, the continued emphasis on the MSME and infrastructure sectors would spur demand in metal and energy commodities, invigorating their markets. The Centre’s decision to create an institutional mechanism, involving the use of commodity derivatives (futures and options) and expansion of warehouse repository system, to develop appropriate policies and practices for price and demand forecast, gives the market mechanism its due importance, with future positioning being critical to serve policy ambitions.

The commodity derivatives market has long been known as one of the most efficient and low-cost institutions for discovering future prices and demand, and as the Centre has given recognition to this institution, we would expect many measures to strengthen the commodity derivatives markets.

Two of such measures have already been announced: firstly, the amendment of Section 43(5) of the Income Tax Act, 1961, so as to categorise all exchange-traded commodity derivative transactions as speculative, including the ones where Commodity Transaction Tax (CTT) is not applicable. This measure would make hedging of agricultural commodities using exchange-traded derivatives a cost-effective proposition as the gains in business incomes of agri-commodity stakeholders can now be offset with the losses in derivatives trading, aligning the tax treatment with the fundamentals of hedging: loss in one market being offset by gains in another market.

The second important decision has been the rationalisation of CTT for trading commodity options. The government has decided to include trading in options on commodity derivatives as a taxable transaction and rationalise the rate of CTT on sale of option on commodity derivative where option is exercised at 0.0001 per cent (by purchaser).

These measures will promote a wider participation on the exchange by popularising the newly launched commodity options in India.

With this, agricultural commodity options shall serve as a cost-effective insurance mechanism against any unfavourable price movement and finally wean away the entire farming sector from the government-funded MSP program to market instrument-based support.

Gold policy to add shine

The Budget also announced creation of a comprehensive Gold Policy. While the details are awaited, the intent of the Centre to develop the yellow metal as an asset class and formalise its trade will definitely add to the lustre of gold transactions. Similarly, the decision to create consumer friendly and trade efficient system of regulated gold exchanges will spur transparency in gold transactions. The Gold Spot exchanges and the existing successful trading of derivative contracts in gold will complement each other and provide greater value to stakeholders.

The author is Head-Research, Multi Commodity Exchange of India

Published on February 04, 2018

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