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What can commodity markets expect from the Union Budget?

The commodity markets which started trading futures in 2003 have emerged as a robust exchange to manage commodity risk. However, the growth has not picked up pace and the volumes have actually thinned post-2013 when the Commodity Transaction Tax (CTT) was introduced. Even the CFTC of the US, which regulates the US commodity and interest rate future markets see a huge potential in India. However, there is still a huge unfinished agenda for the commodity markets. This Union Budget 2018 could be a good starting point to address these long-pending issues. What has been the impact of budget on commodity market in the past? What are the Union Budget expectations on commodity market for 2018? More importantly, how will the Budget impact on commodities? Here are some key expectations of commodities market from the Union Budget.

Complete abolition of Commodity Transaction Tax (CTT)..
While the STT was introduced in the equity and equity derivatives market in 2004, the commodity markets introduced CTT only in 2013. In fact, post the introduction of CTT, commodity market volumes have taken a big hit. One of the key demands from this budget is to abolish CTT completely. Commodity futures are a low margin game and the imposition of CTT adds a huge cost and almost changes the economics of the trade. As a result, the commodity markets are losing out on the spread traders who trade on thin spreads and provide liquidity in the market. This is almost turning out to be a vicious cycle for the commodity markets.

Focus on eNAM and commit greater investment in infrastructure..
In early 2016 the government introduced the electronic National Agricultural Market (eNAM), which was supposed to offer farmers a platform to directly sell their produce online rather than to go through Mandis. However, APMC is still a state subject and states need to pass the requisite laws to make e-NAM happen. Ironically, it is the states with the maximum mandis that have been lax in eNAM implementation. Apart from state lethargy, there is also a shortage of state infrastructure like weighing, grading, sorting etc which is proving to be a hurdle. The current budget would do well to address this issue urgently so that eNAM would actually take off in India and enable farmers to sell their produce directly.

New products and cross hedging
The commodity markets launched futures in 2003, but options were launched only in 2017. In between there have been no innovative products launched. With the regulation of commodities futures also coming under the purview of SEBI, the focus will be on what new products that SEBI and the exchanges can launch. The recent decision to provide cross-licenses to equity exchanges and commodity exchanges could also be a big boost. Commodity markets are also looking at opportunities to hedge across products and markets.

Resolution to the NSEL fiasco and unity of regulation..
The National Spot Exchange Ltd. (NSEL) fiasco not only raised a question mark over the functioning of the spot exchange but also dampened the volumes of the commodity futures exchange. The markets will be looking at a resolution to this issue in this budget. It is almost 5 years and there is still no resolution in sight. Nearly Rs.5600 crore worth of investor money is still stuck and that is proving to be a big drag on commodity volumes. One of the reasons is the dual regulation wherein SEBI regulates the commodity futures market but the commodity spot markets are being regulated by the respective states. A way around this dichotomy is also expected in this budget as a renewed push to the idea of spot exchange.

Paving the way for institutional investors in commodities
To be fair, this has already been done. In fact, FPIs were allowed into commodities in 2014 and mutual funds were permitted to start dedicated commodity funds in 2017. However, there has been little progress on the FPI front despite the passage of 4 years. Obviously, there are concerns over the nature of regulation and most institutional investors are not comfortable with a market that is not entirely liquid and the control of volumes is in a few hands. Also the dual regulation is an issue. It is hoped that this budget makes an attempt along those lines.

Big boost for contract farming through model law
 Interestingly, this also comes under the purview of state laws. Quite a few states have provisions for contract farming. The advantage is that this will permit farmers to directly sell their produce online and can also sell their produce forward to hedge against price risk. This can be done on the commodity futures market. It is expected that this budget will make an attempt to finalize the model central law as in the case of RERA and then put the pressure on the states to follow suit. It worked in RERA and it should work here too.
There is a huge unfinished agenda for commodity markets. One hopes that the Union Budget 2018 moves quickly to address some of these pressing issues.

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