Gold traders were rightly worried in the run up to the announcement of fresh Budget proposals by Finance Minister P. Chidambaram. The minister, who seems to believe that India's battle with a burgeoning current account deficit (CAD) is largely due to the country's massive appetite for gold, had increased import duties on the yellow metal just weeks before. He was expected to propose another hike in the Budget.
Better sense seems to have prevailed. Amid concerns that another increase in the current six per cent import duty would increase gold smuggling into India, Chidambaram did what he did with several other things in his Budget. He chose not to rock the boat. So while he grumbled about the high CAD and blamed it on "our excessive dependence on oil imports, the high volume of coal imports, our passion for gold, and the slowdown in exports," he generally spared the commodities sector.
Gold has been a prickly issue with the government, as India's unending appetite for the metal at a time when prices are high and the rupee weak has been eroding foreign exchange resources. India, the world's biggest bullion buyer, imported 860 tonnes of gold in 2012, down just 11 per cent from a year earlier, despite record high prices in the second half. Gold is second only to crude oil in India's import bill.
Gold has been a prickly issue with the government, as India's unending appetite for the metal, at a time when prices are high and the rupee weak, has been eroding foreign exchange resources
A Reserve Bank of India panel had in its final report on issues related to gold imports this February, suggested imposing limits on the volume and value of gold imported by banks under "extreme situations", and goldlinked financial instruments as part of several measures to moderate the demand for the yellow metal. At least some of the steps suggested were expected to find place in the Budget. But they did not. Introduction of inflation-linked bonds and certificates was the farthest Chidambaram went. But he did propose to raise the duty-free allowance for bringing in gold jewellery to Rs 50,000 for a male passenger and Rs 100,000 for a female passenger. Prices of gold have risen sharply since the baggage rules were last amended in 1991 and passengers were often harassed on this count. This is unlikely to greatly impact imports.
Chidambaram also chose not to concede to other industry demands such as removal of import duty on iron ore or to raise duties on some steel products to support domestic manufacturers. Any duty reduction would have amounted to sacrificing revenue and Chidambaram opted for the status quo.
In the physical market, Chidambaram withdrew the export duty on de-oiled rice bran oil cake as it had made exports unviable, but hectic lobbying by the vegetable oil trade and industry to increase the customs duty on imported oils, especially palm oils, did not pay off.
The edible oil industry had demanded raising duty on crude palm oil to 10 per cent from the existing 2.5 per cent, and refined oils to 20 per cent from 7.5 percent, to maintain a workable differential between the two to help the domestic processing industry.
India imports nearly half of its annual edible oil requirements. In 2011/12 (November-October) it bought 9.98 million tonnes of edible oils, including 8.4 million tonnes of crude oils, mostly palm oils from Malaysia and Indonesia. Industry officials say the two producers have huge palm oils stocks and are pushing aggressively for exports, depressing local prices. Imports in the first three months of the new oil year grew 27 per cent over the same period a year ago. The Budget was silent on this.
Chidambaram was also expected to roll out some measures for the decontrol of the sugar industry. The food ministry had moved a inter-ministerial note on deregulating the sensitive sector broadly in line with the recommendations of the Rangarajan Committee, which, among other things, favoured ending the release-order mechanism and removing the levy sugar obligation. Under the levy system, sugar factories are obliged to sell 10 per cent of their produce to the government at a fixed lower price, which is in turn sold to the poor at a subsidised rate. The government also sets a quota which millers can sell in the open market under the release mechanism. Removal of the release mechanism would help millers manage their inventories better and improve their cash flows.
Chidambaram was expected to impose an excise duty of Rs 150 per 100 kg on sugar, against the existing Rs 98, as part of measures to better manage subsidies and streamline the sector. But it seems differences between the finance and food ministries over the level of duty delayed the step. The finance minister, obviously, was not keen to include announcements such as the industry decontrol, in the Budget that would give a handle to the Opposition to term it as inflationary.
Given the government's past financial profligacy, the finance minister's hands were tied. Hopefully, he will still have opportunities to fix things outside the Budge.
But Chidambaram did have something for the commodity markets. He proposed the introduction of a Commodities Transaction Tax (CTT) on non-agricultural futures contracts at 0.01 per cent. Non-agricultural commodities such as gold, silver, crude oil and natural gas make up for more than 85 per cent of the total estimated daily trade turnover of Rs 600 billion. Exchange officials say up to 20 per cent of this business could be lost because of the increase in transaction costs. With trading volumes going down, the government might end up earning only Rs 15 to 20 billion annually against earlier expectations of Rs 50 billion, according to some estimates.
Apart from revenue implications, CTT can be a step towards bringing down paper trading as opposed to hedging, and the money could be used to reform the markets.
Five commodity exchanges had together lobbied against the tax, saying it would hit trading volumes hard and drive trades towards international markets. But the minister did not budge.
Chidambaram did his best to ensure that he does not rock the boat when the country's finances are in a perilous state and the country is under pressure from rating agencies and investors to keep things under check. Given the government's past financial profligacy, the finance minister's hands were tied. Hopefully, he will still have opportunities to fix things outside of the Budget.(The columnist is Editor in Chief, Indoasiancommodities.com)