Commodities Expectations From the Budget 2008

The “Budget” would mean “taxes” to an ordinary individual, “tax treatment and sops” to the Corporate. It would mean “many” to the commodity market participants and the ecosystem, as most budgetary announcements, in one way or the other, affect the commodities ecosystem in terms of trading or pricing of commodities. Let us not forget here that each and every 1 billion-plus citizen of this country is a player in the commodities ecosystem, given the vast array of commodities traded on the exchange platforms. And this is the most unique property of commodities that makes it special!

This is one of the major reasons why an entire set of players in the commodities ecosystem keenly watches the budget process for the changes which it would bring into the ecosystem.

The exchanges play their part in stimulating liquidity in relevant commodities and educate the physical market participants on the benefits of participating on a futures platform. Yet, their participation is a function of their felt need/benefit of participation on the commodity futures platform. One of the ways it can be incentivized is by allowing them to set off their business profits that might be accrued to them against the losses that could occur in trading or, at least, allow them offset against the trading benefits. Further, it could also be beneficial if banks provide advances against those commodities whose future prices have already been locked in by the participants. This can be done through participation on the futures platform, at a concessional rate, taking reduced risk in such a transaction into consideration. Alternatively, banks, if allowed, can hedge such risks in commodity-based lending on the exchange platform and continue to lend the highest possible value at competitive rates.

An exchange discovers a fair ‘scarcity price’ for commodities in advance with the right participation. Nevertheless, due to sheer financial requirements such as larger delivery size, daily ‘pay in’ and ‘pay out’ obligations, it could still be keeping marginalized sections of the ecosystem away from its platform. A significant portion of them would include the small and marginal farmers for whom these marketplaces have been set up. This should be worked out.

The media, through which information can be delivered, would vary from personalized modes of mobile and wired phones to public modes such as television, newspapers, and ticker boards to reach out to the last mile. The cost limitations in it can be better addressed by widening the reach of prices through government initiatives. Under such conditions, it is necessary that the government make a larger investment through the regulator, Forward Markets Commission (that SEBI is to stock market).

Further, the interpretation of prices emanating from the exchanges would become easier if there were no distortions by way of multiple local taxes/levies, which may not be clear to the participants. Any effort by the budget process to ensure uniform VAT structure across all the states of the country would go a long way in helping the farmers, traders, consumers across the country to infer the exchange-disseminated prices more correctly. It would make the exchange-disseminated prices more relevant to the stakeholders.

To make futures more relevant to all the participants, participation of banks and financial institutions is essential. This would generate liquidity in the market not only by encouraging participation of all sections of the ecosystem but also through generating large positions in the market to help large organizations, including the corporate, and the public sector institutions participate on the exchange platforms efficiently. This would also strengthen the fundamentals that are percolating into the trading floor. As the stock markets do, allowing banks and funds would also help commodity exchanges increase retail participation.

It is essential that we have a strong infrastructure to effectively liberalize the economy and yet remain globally competitive. The commodity exchanges and supporting agricultural infrastructure facilities in the supply chain of agricultural commodities are critical to the agricultural ecosystem. Thus, the development of such facilities is necessary to ensure overall development of the country’s agricultural and rural economy. Hence, to encourage infrastructural development in India, the Government has provided certain tax concessions to businesses engaged in infrastructural development activities.

Hence, to give impetus to the exchanges for proceeding with their plans faster and undertaking large-scale investments, exchanges and enterprises/undertakings engaged in the business of development of allied agricultural infrastructure should qualify for such tax benefits under a separate provision of the Act. Indirectly, it would lead to the development of agriculture and related infrastructure crucial for sustained economic growth of the economy.

Saurabh Sharma