In his Budget speech, Finance Minister P Chidambaram clearly stated that the CTT would be introduced in a "limited way" and that agricultural commodities would be exempted. But when the tax was notified on June 19, the list of taxable commodities included sugar, soya oil, gur, RBD palmolein (a refined, bleached and deodorised form of palm oil), rubber and guar gum, raising the cost of futures trading for these agricultural commodities by four and a half times. This has jolted the market.
The department of revenue seems to feel that these items cannot be considered agricultural commodities since they come out of factories, rather than straight from the farm. But this is a specious argument. Even though these commodities are processed, they behave like a "primary" farm produce for their value chain.
In this context, the definition of agricultural commodities, according to the Food and Agriculture Organisation of the United Nations in its corporate document repository, is instructive. It says, "The term 'commodity' is commonly used in reference to basic agricultural products that are either in their original form or have undergone only primary processing. Examples include cereals, coffee beans, sugar, palm oil, eggs, milk, fruits, vegetables, beef, cotton and rubber."
For thousands of sugarcane farmers, sugar is the primary commodity because its prices determine the price of their produce. There is no organised trading of sugarcane in the country. Similarly, the price of gur, another processed product from sugarcane, is used for setting prices of the latter. The price of soya oil is the basis on which farmers quote the price of their soya bean. Although soya bean is available for trading in the futures market, the core market interest lies in the processed product, i.e. soya oil, as evident from larger volumes and liquidity in the latter. Soya bean registered a daily trading of Rs 741 crore in 2012-13 vis-à-vis daily trading in soya oil of Rs 1,897 crore on the the National Commodity and Derivatives Exchange (NCDEX) suggesting a larger market interest in the processed product that, in turn, is used as a benchmark for deriving prices of the raw material, soya bean. It is also the basis for determining the price of other oils, such as mustard oil, cottonseed oil and groundnut oil. Similarly, guar gum prices are the deciding factor for farmers planting guar.
So to consider them non-farm commodities is absurd and defies market reality.
The finance minister excluded farm commodities from the burden of the CTT for two special reasons: one, any extra tax on food products would eventually add to food inflation; and two, futures trading is still nascent in farm commodities. Both these objectives are defeated by the current notification.
Sugar and soya bean oil are essential food items for almost all households in India. They also have a significant weight in our wholesale price index. Increase in the cost of trading these commodities would certainly be passed on to consumers and add to the inflationary spiral. Refined soya oil, palm oil, gur and sugar, together, contribute 11 per cent to the weight in index of wholesale prices of primary food articles and manufactured food products, such that increase in taxes on these commodities would make the current challenge to contain food inflation tougher. Inflation in soya oil, gur and sugar has remained high, averaging above 10 per cent through 2012-13 in the wholesale market. More, the passage of higher prices from wholesale to the retail market would make the task of containing consumer-side inflation a more daunting task, given the inherent rigidity in retail prices.
The CTT is particularly ill-timed for the recently liberalised sugar industry. The government wants to encourage the industry by allowing it to get a free and fair price for sugar and improve profitability. This can only be achieved if mills use futures trading for price discovery as well as risk management. The sudden and unwarranted imposition of the CTT would deter mills from coming forward to enjoy the fruits of decontrol. Eventually, their reluctance will impact returns and their ability to pay farmers an attractive price for cane.
In short, the current CTT notification flouts not just the will of Parliament when it was passed in the Budget, but also the government's own stated objectives to promote correct and transparent pricing of farm produce through the futures market. Planting for the kharif season is on in full swing and farmers will be looking to the futures market for price signals in sugar, soyabean, and guar. Fractured trading and market uncertainty could distort these signals making the matter urgent.
Repealing of the CTT on processed agricultural commodities is essential for sound functioning of the entire food economy. All stakeholders from farmers to consumers in the value chain, irrespective of their presence or absence from the futures market, would be adversely impacted by the disruption in price discovery of key processed agricultural commodities. Inflationary pressure is bound to intensify, as higher transaction cost of futures trading is passed on in the supply chain. Processed agricultural commodities need to be treated on a par with basic farm commodities and exempted from the CTT in the larger interests of the Indian farmers and consumers.
The writer is Chief Business Officer, NCDEX