Finance minister P Chidambaram spared agricultural commodities traded in the futures market of a new commodity transaction tax, which could have pushed food inflation levels higher.
The minister instead proposed a transaction tax of 0.01% on non-agri futures. The Commodity Transaction Tax (CTT), on the lines of Securities Transaction tax, would work out to be Rs 10 for every transaction worth Rs 1 lakh.
Among a slew of reform-oriented steps announced last year, the government had passed a bill to amend the Forward Contracts (Regulation) Act to strengthen the futures market.
Chidambaram said trading in commodity derivatives would not be considered as speculative transaction and hence, the CTT would be allowed as deduction if the income from such transaction forms part of the business income.
An updated law seeks to enhance the Forwards Markets Commission into an independent regulator, apart from widening India's rapidly growing futures markets.
A 'futures contract', the market for which is rapidly growing in India, is an agreement to buy or sell goods, such as food commodities or metals, on a future date but at an agreed price that is set at present.
For example, a wholesaler in January could set up a contract to buy 100 kg of potatoes from a farmer at Rs 1,500 to be delivered when the harvest is ready in April. This enables better price discovery. Both the buyer and seller will get to transact the commodity at that price, regardless of whether the market price of potatoes later changes or not.
An efficient futures market therefore is said to curb price volatility or sudden changes in prices. A futures contract also acts as a hedge against adverse market conditions.
The amended bill also seeks to introduce 'options', which are insured contracts and gives protection against falling prices through a mechanism called 'put' and rising prices through a devise called 'call'.
However, speculators operating in futures markets are often blamed for inflation. Without strong regulation, speculators can swing prices one way or another. A speculator, for instance, could offer higher prices for oil futures, prompting oil producers to cut current supply so that they can sell it in the futures market. This will drive up both current and future prices.
The Abhijit Sen-led committee, set up by the government, however did not find any link between futures trading and food inflation. India had banned rice, urad and tur futures and suspended sugar futures in 2009, after a severe drought.
"There is no distinction between derivative trading in the securities markets and derivative trading in commodities markets. Only the underlying asset is different. It is time to introduce commodity transaction tax in a limited way," Chidambaram said.
The new tax has disappointed the futures market. Shreekant Javalgekar, CEO of the country's largest commodity bourse MCX, said, "CTT on selected items is not good. It will increase the hedging cost by 310%."