The Budget's proposal to impose a commodity transactions tax (CTT) on non-agricultural commodities is a regressive step-one that can have ruinous impact on the barely decade-old commodity derivatives market. A 0.01 per cent CTT would increase the cost of transactions by more than 300 per cent on an average, which would drive away market participants, since derivative transactions are very sensitive to the cost of transactions.
This would dry up liquidity, increase bid-ask spreads and increase the cost of hedging. A 300 per cent increase in the cost of trading in global commodities would severely impact the global competitiveness of Indian firms, which use the domestic futures market to hedge against volatility in metals and energy prices. It will setback the market by decades and India will lose out to China in becoming the price setter in certain commodities, specially bullion and base metals.
The proposal of CTT is a discriminatory step on at least two counts. First, it accords differential treatment within the commodity derivatives market, by taxing only non-agricultural commodities. Second, there is no rationale for imposing a transaction tax on commodity markets and exempting a larger derivative market – the currency market. CTT is regressive by design and the proposal of introducing it in a different market is devoid of any rationale.