Now that commodity transaction tax (CTT) has become a reality after intense lobbying by various commodity futures exchanges failed to impress the Finance Minister, one is left wondering, in hindsight, if it was a case of overkill by the concerned interests.

Over the last two months, all stakeholders including policymakers were subjected to a series of news reports – many of them suspected to be inspired – arguing against levy of CTT, several press conferences and seminars of the commodity futures industry as also visits of high ranking exchange officials to newspaper offices to ‘convince the media’ that such a levy was not in the interest of the futures industry. It is likely that the industry protested too much which actually drew close attention of the policymakers to the revenue potential.

Worse, official statements to the media and those made in private exposed how some organisations and people carried inter-market and inter-exchange rivalry to ridiculous lengths. The slugfest between stock exchanges and commodity exchanges is already out in the open. What the Budget proposal to impose a 0.01 per cent tax on derivatives transactions despite intense lobby pressure mounted on the Government indicates is that P. Chidambaram, notwithstanding his pro-industry, pro-business image, is not the one to succumb to pressure, has his own mind on issues relating to financial markets and is ready to make clear choices. Many of the futures industry’s arguments against the levy of CTT are specious. It is no secret that hedger participation in commodity futures transactions is rather limited. In some way it reflects the failure of the exchanges to attract genuine hedgers – large producers, processors, industrial consumers and physical market traders – into their fold for price risk management.

Solid structure but…

Also, there is a question mark over what the futures industry and commodity futures exchanges are doing to improve the physical market structure. We have in this country built a solid world-class futures market superstructure on a weak foundation, the unreformed antiquated physical market. Such a superstructure will invariably find itself under threat. Importantly, there is need to distinguish between a genuine hedge contract and a speculative contract on the bourse. What prevents the futures industry and the commodity exchanges from coming up with practical guidelines for separating a genuine hedge transaction from a speculative transaction is unclear.

The industry can no more claim to be nascent. It has been around for ten years now and should lay some claim to maturity by discussing progressive reforms necessary for the market rather than attack policy measure that are intended to generate revenue for the cash-starved exchequer.

The apprehensions of exchanges over the likely fall in trade transactions because of CTT are misplaced. There is tremendous risk appetite among people, who after some initial protests will resume their job. The tax will be absorbed.

Now that the FM has proposed to levy CTT, it should be notified immediately and collections should begin. In fitness of things, a part of the estimated Rs 1,500 crore revenue generated through CTT should be ploughed back for bringing about market reforms.

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