Budget fails to enthuse commodity markets

Though the Union budget’s thrust was on getting agriculture and rural economy back on track, there was no major announcement for the commodity markets per se. The minimum support price for kharif crops may push agri commodity rates up in the coming months, while introduction of the commodity transaction tax for non-agri options will dampen the sentiments in the market.

In order to help farmers realise at least 50 per cent more than the cost of their produce or 1.5 times of the cost of their production, the government announced MSP for all unannounced crops of kharif. The government has already announced MSP of at least 1.5 times of the cost of production for majority rabi crops.

If the price of the agriculture produce in the market is less than the minimum support price, then the government would purchase either at MSP or try to provide MSP for the farmers through some other mechanism. Niti Ayog, in consultation with central and state governments will put in place a foolproof mechanism so that farmers will get adequate price for their produce, the budget said.

“Fixing MSP for unannounced kharif crops will see prices of those agri commodities going up. Our agriculture production is on a record high. We produced over 275 million tonnes of grain and 300 million tonnes of fruits and vegetables in 2016-17. The prices of most of the commodities have remained low due to higher production. From these low levels, anyway the prices had to move upwards. Now MSP will further support the bullish sentiments,” said Ajitesh Mullick, assistant vice-president, retail research, Religare Commodities.

Kharif produce includes rice, maize, cotton, soybean, pulses and those crops that have an MSP below 1.5 times of the cost of production might see a new rate fixed. While pulses are not traded in the commodity markets, channa, a rabi crop, would benefit from MSP of other pulses.

The budget also introdu­c­ed CTT for non-agri opti­o­ns contracts. Currently, only non-agri futures contracts have to pay CTT. Among non-agri commodities, options contract is available only for gold. “CTT of 0.125 per cent of the settlement value would be imposed only on the seller. Though the tax component is relatively small and can be absorbed by sellers, sentiments will be negative,” said Himanshu Gupta, chief market strategist, Karvy Comtrade.

The market has been asking for abolition of CTT for the past few years. After the introduction of CTT in non-agri futures, the turnover of the commodity exchanges came down significantly and has not yet recovered fully.

“In commodity trading, large volumes of dabba trading happen outside the exchanges. After CTT, a large portion of the trade moved back to dabba trading. That has not been the case of stock markets. Despite the introduction of the securities transaction tax (STT), the markets bounced back and touched new highs,” said Gupta.

Further, the stock markets offer long-term investment options, while commodity market instruments are meant for trading and contracts are largely short-term in nature.

Since the merger of the federal open market committee with the securities and exchange board of India (Sebi), the market regulator has been trying to revive trading volumes in commodity markets. CTT on non-agri options have at least hit the sentiments, especially when the demand was its abolition.

The market also had expected reduction of import duty for gold as the current account deficit has been under control for some time now. However, the duties moved up a bit to 10.3 per cent. No duty reduction was announced in crude oil either.

Higher crude oil prices and hike in MSP rates may put upward pressure on inflation. “A rise in agricultural income for farmers would mean a higher price realisation for them for their produce. This could result in higher price of agri commodities, leading to some upward pressure on the inflation. It would need some proper handling of the situation to ensure that both farmers get good prices and consumers too do not get adversely affected by any rise in prices,” added Mullick.


Sangeetha G.