Economic Impact of Commodity Transaction Tax on Futures Contracts

Abstract

The commodity futures market is a home-grown economic institution with a perceptible impact on its stakeholders and value chain players. The introduction of the Commodity futures in India was made with the dual purpose of promoting price discovery and enhancing risk management. Hence, there is a case for policy push for further development of this market, so that its beneficial effects can be spread across many more potential market participants. As the size and the multiplier effect of the commodity derivatives market in India is still quite small by international standards, if the market is to be given a fillip for growth, the policies should be actively revenue positive. This paper analyses the impact of the Commodity Transaction Tax on the health of the Commodity Futures Market using very detailed data from the MCX. The analysis is done, in terms of four major commodities: Gold, Silver, Copper and CPO, from the perspective of (i) Turnover (both average and volatility), (ii) comparison of trading cost (both with leading international commodity futures markets as well as the securities market in India), (iii) the Bid-Ask spread as an indicator of the depth of the market, (iv) impact costs of trading, (v) tax revenue. It is obvious that the introduction of CTT has adversely impacted the market on all counts, with the impact being of such a magnitude that it is extremely unlikely that market will recover to its original position. It calls for an urgent relook at the system if the health of the market is to be restored.