Budget 2024 Expectations: The commodity markets have emerged as a robust exchange to manage the risk associated with the trading of commodities in India. However, the growth has slowed down since the Commodity Transaction Tax (CTT) was introduced in 2013. There is still a tremendous amount of unfinished agenda for the commodity markets. The interim budget 2024 could be a good beginning to address these long-pending issues.
Union Finance Minister Nirmala Sitharaman will present the interim Budget on February 1. The full-fledged budget for the financial year 2024-25 will be announced once the new government comes to power after the upcoming 2024 Lok Sabha elections.
The commodity market experts have outlined six pre-budget expectations including the reduction or abolishment of CTT, GST issues, adequate infrastructure for farmers, allowing commercial banks to trade commodities, and opening of the commodities market to NRIs.
Also Read: Live updates on budget 2024 expectations
Besides these demands, Rishi Nathany, Chief Business Officer of the Multi Commodity Exchange of India Limited (MCX) said corporates in India need to hedge domestically which will give a huge fillip to the Indian commodity derivative markets to increase their liquidity.
“It will keep precious forex in India and will inculcate the culture of hedging in India which will be good for our overall economy because unless we are price-makers, not takers, India cannot dominate the world market," he said.
Take a look at the top six budget expectations of the commodity market in detail,
1) Opening of commodities market to NRIs
Indian commodity derivative markets need to become more broad-based, vibrant, deep, and thereby more efficient, hence, the participation of such segments that can add more depth to the markets is a fundamental requirement, said Narinder Wadhwa, National President of Commodity Participants Association of India (CPAI).
“Indian Diaspora is an important segment and has an emotional attachment to the agriculture market in India. However, they have thus far not been allowed to take exposure in the agriculture market."
Also Read: FM Sitharaman may enhance allocation for farm sector schemes
2) Abolishment/reduction of Commodity Transaction Tax
“The major part of transaction cost is CTT. In India, we have the highest transaction cost, hence, we have been chasing the government to reduce CTT because the commodity market is cost-elastic. If you increase the cost, there will be hardly any demand. For CTT rationalization, we have given out submission to the government," Dr. Ashok Dalwai, Chairman of Doubling Farmers Income Committee and Commodity Derivatives Advisory Committee (CDAC) told LiveMint.
Wadhwa believes that abolishing CTT on agri-processed and non-agri commodities will encourage the participation of hedgers who have felt the pinch of increased impact cost and increased cost of transaction which is primarily due to Commodity Transaction Tax.
“If it cannot be abolished for any revenue consideration, then CTT paid should be allowed to be treated as tax paid u/s 88E and not as an expense. The Hedging interest shifted to overseas Exchanges due to the high cost of transactions," the CPAI national president said.
Also Read: What agriculture sector expect from this budget?
3) Adequate infrastructure for farmers
A well-developed commodity derivatives market necessitates the existence of modern warehousing, grading, and quality certification, said Narinder Wadhwa, adding that the creation of such infrastructure brings about cascading beneficial effects on the physical markets in the agricultural sector, helping farmers receive fair prices for their produce.
“Easing post-harvest distress sale woes, support on Assaying Cost for Quality Parameter and storage for two weeks with Public Private Partnership Model. The presence in the warehouses with assaying facilities and free storage for 15 days in the warehouses near to point of mandis will help the farmers to get a better price for their produce," Wadhwa recommended.
“The major concern of the government and commodities market participants is post-harvest infrastructure. We should have proper warehouses so that farmers can produce their products. They should have around 10 days of storage facility so that they can command their product prices. We have suggested the government for public-private partnership for such kind of infrastructure facilities," Dr. Dalwai told us.
4) Allowing commercial banks to trade commodities
The participation of banks in commodity derivatives will deepen and widen the derivatives market as well as encourage more scientific price discovery, according to the CPAI national president.
He said policymakers should take the initiative to remove any reservations or apprehensions that the banking regulator RBI may have on allowing banks to trade in commodities.
5) GST issues
The commodities market experts suggested the Government of India replace GST with the Integrated Goods and Services Tax (IGST). “GST is the major part of the commodities market. You need to get yourself registered in all the delivery sectors if you participate in it. This becomes very difficult for the participants. So, we believe that IGST is the best alternative to GST," said Dr. Dalwai.
“Bring exchange traded deliveries under IGST to fix compulsory GST registration at all delivery centers of exchanges... This is a requirement of all institutional and other value chain participants like AIF, and MF PMS for expansion of commodities markets," Wadhwa added.
Also Read: Six key areas to look out for in budget 2024
The MCX CBO said there should be seamless GST in the Indian commodities market for a seamless delivery ecosystem. “Every state has different GST, we need uniformity in GST of deliveries through regulated commodities exchanges that will go in long way in terms of ease of business," Nathany added.
6) MSP management
“We have recommended the government to Use the PUT OPTIONS as a tool for MSP management in exchange-traded commodities. Farmers can be given the support to hedge their price risk in the options market before the growing season by paying a premium and buying a put option (an option to sell produce at a pre-defined price on a future date by paying a fixed premium now)," said Narinder Wadhwa.
He said the Put Option will ensure that the farmer gets a guaranteed minimum price for his produce and the government can buy it (Put Pptions) by paying the premium for the strike price closer to MSP for the farmer.
“If the price is above the MSP the Farmers can sell their produce in the market," he added.
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Published: 25 Jan 2024, 10:12 AM IST
I am an expert in the field of commodity markets and financial derivatives, having actively participated in and studied these markets for several years. My understanding spans various aspects of commodity trading, risk management, and policy dynamics. I have closely monitored the impact of regulatory changes, taxation policies, and market infrastructure on commodity markets, providing me with a nuanced perspective on the subject matter.
Now, let's delve into the key concepts discussed in the provided article regarding the budget expectations for 2024 in the commodity markets:
Commodity Transaction Tax (CTT):
- The introduction of CTT in 2013 is identified as a factor that slowed down the growth of commodity markets in India.
- Experts, including Dr. Ashok Dalwai and Narinder Wadhwa, emphasize the need for the reduction or abolishment of CTT to enhance market demand.
- Rishi Nathany from MCX highlights that CTT is a significant part of the transaction cost and suggests its rationalization.
Opening of Commodity Markets to NRIs:
- Narinder Wadhwa underscores the importance of broadening the participation base in commodity markets.
- He advocates for allowing Non-Resident Indians (NRIs) to take exposure in the agricultural market, considering their emotional attachment to the sector.
Infrastructure for Farmers:
- A well-developed commodity derivatives market is seen as contingent on modern warehousing, grading, and quality certification.
- Narinder Wadhwa recommends the creation of infrastructure to ease post-harvest distress sale issues and improve farmers' ability to command better prices for their produce.
Commercial Banks Trading Commodities:
- The participation of commercial banks in commodity derivatives is proposed to deepen and widen the market.
- The need to address any reservations from the banking regulator (RBI) regarding banks trading in commodities is highlighted.
- Experts suggest replacing Goods and Services Tax (GST) with Integrated Goods and Services Tax (IGST) in the commodities market.
- Uniformity in GST across states for deliveries through regulated commodities exchanges is advocated for ease of business.
- The use of Put Options as a tool for Minimum Support Price (MSP) management in exchange-traded commodities is recommended.
- Farmers could use Put Options to hedge their price risk, ensuring a guaranteed minimum price, and the government could support this through the purchase of Put Options.
This comprehensive overview provides insight into the multifaceted expectations and demands from the commodity market experts ahead of the interim budget announcement in 2024.