Indian government announced its annual Budget today, February 1, and the general positive reaction in the equity market and stable Indian rupee indicated that market players have reacted positively.
As for the commodities market, there has been no change in the commodities transaction tax. However, we have seen a few changes in customs duty, which may affect commodity prices.
Bullion and Metals
Base customs duty on gold and silver have been reduced from 12.5 percent to 7.5 percent, but gold and silver will attract a 2.5 percent agriculture Infrastructure and development cess at the rate of 2.5 percent so the net rate will be 10 percent.
The Social welfare surcharge (SWS) on Agriculture Infrastructure and Development Cess is being exempted for gold and silver. However, 10 percent SWS will be applicable on base customs duty.
So the net implication will be 7.5 percent+( 10 percent of 7.5 percent) +2.5= 10.75 percent. Since MCX Gold and Silver price includes custom duty, a reduction in tax may result in lower prices. However, the impact may not be exact as India is a major consumer of gold and silver and a lower price may boost demand expectations supporting international prices. We saw a negative price reaction in MCX Gold April contract which hit a low of near Rs 47,200 but has recovered to trade near Rs 48,400. MCX Silver price has come off the highs but the price continues to trade higher as duty cut is countered by gains in the international market.
Also in bullion sector, in lieu of 2018-2019 Budget announcement of establishing a system of regulated gold exchanges in the country, SEBI will be notified as the regulator and Warehousing Development and Regulatory Authority will be strengthened to set up a commodity market ecosystem arrangement including vaulting, assaying, logistics etc. in addition to warehousing. This is not likely to have any direct impact on price.
In other commodities, customs duty on copper scrap has been reduced from 5 percent to 2.5 percent. This is unlikely to have any direct impact on MCX Copper prices.
Agri Sector
With regards to the Agri sector, the Finance Minister assured that the government is committed to the welfare of farmers and reiterated that MSP has been increased to 1.5 times the cost of cultivation.
Pointing at the development on procurement front Finance minister said, "In the case of wheat, the total amount paid to farmers in 2013-14 was Rs 33,874 crore. In 2019 -20, It was Rs 62,804 crore. In 2020-21, this amount paid to farmers was Rs 75,050 crore. The number of wheat growing farmers benefited increased to 43.36 lakh compared to 35.57 lakh in 2019-20."
For paddy, the amount paid in 2013-14 was Rs 53,928 crore. In 2019-20, this was increased to Rs 1.41 lakh crore. In 2020-21, this was further estimated to increase to Rs 1,72,752 crore.
Cotton farmers saw a stupendous increase in the amount that was paid to them in 2013-14, that was Rs 90 crore and it was increased to over Rs 25,000 crore in 2020-21,” said Finance Minister.
In the interest of farmers, the Finance Minister has increased import duty on cotton from 0 percent at present to 10 percent.
With regards to CPO, the government has reduced basic import duty to 15 percent but levied Agriculture Infrastructure and Development Cess (AIDC) of 17.5 percent. Taking a base of 100, basic import duty will come to 115. Charging 17.5 percent AIDC on that total import duty comes to 35.125 percent from 30.25 percent at present (Base duty at 27.5 percent + 10 percent social welfare cess). Notably, the government in November last year reduced import duty on CPO by 10 percent to alleviate sharp rally in domestic edible oil prices.
On Soy oil and Sunflower oil, import duty was set at 35 percent earlier, on which, 10 percent social welfare cess was being charged. Total import duty stood at 38.5 percent. Government has now reduced the base import duty to 15 percent on crude soy oil and sunflower oil and levied 20 percent AIDC on each. Charging 10 percent Social welfare cess on the same new effective import duty comes at 38.5 percent. That means, there will be no change in import duty on soy oil and sunflower oil.
1,000 more Mandis are to be integrated into the E-NAM market place.
In the recent budget, the Finance Minister also proposed to increase agriculture credit target to Rs 16.5 lakh crore from the current fiscal target of Rs 15 lakh crore.
Note: These are our analysis of Budget and we may confirm the new applicable import duty for the products post-release of custom notification.
(The author is VP- Head Commodity Research at Kotak Securities)
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