Joseph Massey, deputy managing director, MCX, writes for ET.com, on his expectations from the Union Budget 2008-09. MCX is an independent and de-mutulised multi commodity exchange, with recognition from the government, which helps facilitate online trading, clearing and settlement operations for commodities futures market across the country.
Budget would mean taxes to an individual, tax treatment and sops to the corporate, and it would mean many to the commodity market participants and the ecosystem as most budgetary announcements in one way or the other affect the commodities ecosystem in terms of trading or pricing of commodities.
Let us not forget here that each and every one billion-plus citizens of this country is a player in the commodities ecosystem given the vast array of commodities traded on the exchange platforms. This is one of the major reasons why the entire set of players in the commodities ecosystem keenly watches the budget process for the changes that it would bring into the ecosystem.
Given the potential coverage of the exchanges in terms of the commodities and hence, their stakeholders, diverse cultural background and economic objectives that various potential participants might have, their reach in terms of benefiting them directly or indirectly is dependent on the exchanges ability to reach out to them and make them understand what it is and why should they participate ie what is the need for them to participate.
One of the basic functions of futures trading ie price discovery whose efficiency is a function of intensity of the relevant information regarding the fundamentals of the commodity that is factored into the prices discovered on the exchange platforms. Relevant information on fundamentals are available with the direct participants such as the traders, producers, and corporates active in the particular commodity market sector who are privy to such information.
Though the exchanges are reaching out, their participation on the futures platform is a function not only of awareness, but also the felt need for it, access to it, the ease of entry and exit on the platform (called liquidity in the exchange parlance), and incentives that they could derive out of it apart from the benefit of risk sharing.
While the exchanges play their part in stimulating liquidity in relevant commodities and educate the physical market participants on the benefits of participating on a futures platform, yet their participation is a function of their felt need/benefit of participation on the commodity futures platform.
One of the ways it can be incentivised is through allowing them to set off their business profits that might be accrued to them against the losses that could occur in trading or at least allow them offset against the trading benefits. Allowing this by amending Section 43(5) in the Income-Tax Act, 1961 would go a long way in attracting the physical market participants on to the platform. Further, it could also be beneficial if banks provide advances against commodities whose future prices have already been locked in by the participants through participation on the futures platform, at a concessional rate taking reduced risk in such a transaction into consideration.
Alternatively, if allowed, banks shall hedge such risks in commodity-based lending on the exchange platform and continue to lend the highest possible value at competitive rates.
As an exchange discovers a fair scarcity price for commodities in advance with right participation, due to sheer financial/participation requirements such as larger delivery size, daily pay in and pay out obligations, it could still keep marginalized sections of the ecosystem away from its platform. A significant portion of them would include the small and marginal farmers for whom these marketplaces have been set up.
However, the experience of other nations with mature futures trading platforms suggests that it is not necessary for everyone to participate in the futures market to derive benefits from it. Reality suggests that the exchanges transparency and price dissemination efforts would mostly make up for the losses that the small/marginal farmers could have covered if they had participated on the futures platform.
The entire issue here boils down to available avenues for dissemination of prices that are discovered on the exchanges. The media through which it can be delivered would vary from personalized modes of mobile and wired phones to public modes such as television, newspapers, and ticker boards to reach out to the last mile.
While some of these modes would involve cost to the exchanges for its outreach, others would involve cost to the participants eager to know exchange traded prices. Both these limitations could be better addressed by widening the reach of prices through government initiatives. Under such conditions, it is necessary that the government make a larger investment through the regulator, Forward Markets Commission, to take the benefits of price discovery to one and all in the ecosystem by installing tickers across relevant rural areas.
Further the interpretation of prices emanating from the exchanges would become easier if there were no distortions by way of multiple local taxes/levies which may not be clear to the participants.
Any effort by the budget process to ensure uniform VAT structure across all the states of the country would go a long way in helping the farmers, traders, consumers across the country to infer the exchange-disseminated prices more correctly.
It would make the exchange-disseminated prices more relevant to the stakeholders. Further, reducing the multiplicity of taxes into a single tax would not only make it clear to the players, but also ensure better compliance besides enabling them to take better economic decisions.
To make futures more relevant to all the participants, participation of banks and financial institutions is essential. This would generate liquidity in the market not only by encouraging participation of all sections of the ecosystem but also through generating large positions in the market to help large organizations including the corporates and public sector institutions participate on the exchange platforms efficiently.
Participation of banks and funds would also strengthen the fundamentals that are percolating into the trading floor. As the stock markets do, allowing banks and funds would also help commodity exchanges increase retail participation.
It would also make sense for banks to participate in the commodity exchanges to the extent they have exposure in lending to the commodity-intensive manufacturing industries.
It is essential that we have strong infrastructure to effectively liberalize the economy and yet remain globally competitive. The commodity exchanges and supporting agricultural infrastructure facilities in the supply chain of agricultural commodities are critical to the agricultural ecosystem.
Thus, the development of such facilities is necessary to ensure overall development of the countrys agriculture and rural economy. Hence, to encourage infrastructural development in India, the government has provided certain tax concessions to businesses engaged in infrastructural development activities in Section 80-IA of the Income-Tax Act, 1961.
Hence, to give impetus to the exchanges for proceeding with their plans faster and undertaking large-scale investments, exchanges and enterprises/undertakings engaged in the business of development of allied agricultural infrastructure should qualify for such tax benefits under a separate provision of the Act.
Indirectly, it would lead to the development of agriculture and related infrastructure crucial for sustained economic growth of the economy.
International experience suggests that growth of commodity futures has helped squeeze out the supply chain, reduce marketing costs, increase quality awareness, reduce wastages, boost investments in commodity-related infrastructure, etc.
To replicate this experience, it is time the budget brought in various enabling policy changes to help the producers and consumers benefit from the positive changes in the commodities ecosystem. As long as the primary sector of the economy remains competitive, it automatically brings in competitiveness in the secondary and tertiary sectors of the economy as both these sectors are directly or indirectly dependent on inputs from the primary sector and provide a portion of their goods and services back to it.
It is essential that markets for the primary commodities remain competent in order to improve the overall competency of the economy in the todays age of globalization.