Tuesday, February 10, 2015

Commodities Transaction Tax should be reduced: Religare Sec

Commodities Transaction Tax should be reduced: Religare Sec
Budget should take steps to make commodities markets in India more vibrant. Taxation issues should be resolved and more investments should be encouraged into real infrastructure such as warehouses, cold storage logistics to ensure low wastage.

Any budget raises hopes, especially the first full-fledged one of a new government. This team has also had the privilege of a run up of 9 months to the budget after winning the elections, which has given them enough time to understand the issues at hand. And I must say the time has been utilized well.

On the commodities front, some of the expectations are old while others are new. But the ultimate aim of the budget should be to free our commodity markets and integrate them into the global economy to take maximum advantage of opportunities and get international buy and sell prices commensurate with our production and consumption numbers. While global factors significantly affect commodity prices of bullion, metals and energy, prices of agri-commodities are more affected by domestic policies because we provide them a level of necessary protection. Like every earlier year, agriculture will be a key focus area in this budget and this is an opportunity to address the most crucial issues in this sector.

The fundamental issue is, and has always been, that of adequate funding to lay out effective and comprehensive infrastructure for farming to improve productivity and permanently bring down food inflation. Institutional credit by way of availability of seeds, fertilizers and such at low prices will help raise productivity. Also, the Mandi Acts in different states need to be revisited and a national Act allowing free movement of good, perhaps with a single pay-point and a smart card to track goods movement, should be mooted. Real implementation of GST is a step in that direction. Then, wastage adds 30% to the cost of farm products and that is largely due to lack of suitable storage infrastructure; a policy to encourage a supply chain network – of warehouses and cold chains for example – will go a long way in holding prices low and ensuring availability everywhere. In fact, one of the biggest factors to focus on is storage of goods across the country which, given the scale and size of the mission and the investment and project execution skills required, will work best in Public Private Partnership format. The scope should include not only storage but also procurement and distribution for an integrated approach and the budget is the right platform to address this national requirement. 

The key message in the budget should be that we are a business-friendly globalized market and the medium term goal should be the ability to become a price-setter in the commodities in which we are among the larger producers or consumers of the commodity e.g. wheat, sugar and vegetable oils. Negotiable warehouse receipts are soon to become reality with the setting up of the Warehousing Regulator and incentives for creating infrastructure to support physical commodities trade will make it a winning combination. 

The contentious Commodities Transaction Tax (CTT) should be reduced to Rs 1 per Crore of trading to encourage the fledgling but high-potential new industry and the amount collected should be diverted to improving warehousing & infrastructure facilities. There is also a strong need for a structured and common clearing and settlement system across products – equity, commodity and currency. This has been touched upon by earlier governments but should be implemented in earnest. This will strengthen our risk management systems and reduce transaction costs in markets. There is also a need to increase market participation by allowing banks to hedge the commodities they have exposure in their lending book. Allowing FIIs and MFs will add depth, prevent price manipulation and facilitate hedging by large corporates. And these participants will need new products like options and indices to enable efficient markets. Importantly , primary sector reforms are necessary including enabling sale on competitive market prices as against minimum support prices guaranteed by the government. 

The wish list is long but a firm start with a clear road map will be beneficial for India in the long run.

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