By – Mr. Jayant Manglik, President of Retail Distribution at Religare Securities Limited
The announcement of the Sebi-FMC merger in the last budget gave a policy boost to commodity markets. An empowered regulator and the introduction of commodity derivatives under the definition of securities in the SCRA are bold moves to drive commodity markets growth. The forthcoming budget can take this to its logical conclusion by addressing three key issues.
The first, and most important, is the matter of CTT (Commodities Transaction Tax).
Since it was levied, exchange volumes have fallen by 60% leading to low liquidity and making it difficult for the market to meet its key objectives of price discovery and efficient risk mitigation.
It has also encouraged `dabba’ trading, variously estimated to be between 3 and 10 times of exchange volumes and generating negative revenue to government in addition to allied social ills.
Additionally , business has moved abroad e.g. rupee-denominated gold contracts have been launched by a Dubai-based exchange, obviously with no CTT. Making CTT near-zero for now will result in instant growth in the commodities markets.
The second item is that of allowing new participants and new products to bring the industry on par with the best commodity exchanges in the world.Banks should be allowed to participate as they have commodity exposure through their lending book. Likewise mutual funds, domestic and foreign institutional investors will bring much-needed expertise and depth to the markets. To attract this new set of participants, new products like options and indices are necessary so that they can trade, invest or hedge efficiently .
The third element is the mandatory disclosure of corporate positions on commodity exchanges. This can first be done for PSUs and publicly listed corporates so that they can efficiently manage company as well as shareholder risk.
It will also result in increased transparency and better corporate governance. A similar move was implemented for currency hedging a couple of budgets ago.
Additionally , agricultural insurance, warehousing and financing have to be addressed so that there is no distress sale by farmers. Investments in the agricultural sector must go up sharply to increase crop productivity and lower farmer dependence on monsoons while lowering the cost for the end-consumer.
Also, industry status to the broking industry will assure better access to bank funding and aid its plans to make India a price-setter in the commodities in which we are a large producer or consumer.
Therefore see this Budget as a landmark opportunity for the development of commodity markets in India.
Source The Economic Times