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Six expectations from Budget 2021 for Commodity market by Kotak Securities

The focus of Budget 2021-2022 could be largely to mend the economy and boost growth and fight inflationary pressures. While the economy came under pressure, the commodities market was also not left unaffected.

January 30, 2021 / 12:12 PM IST

The ruling BJP government is set to announce its eighth Annual Budget on February 1, 2021. The year 2020 was a challenging year for all major economies, including India, as governments imposed strict measures to limit the virus spread but this impacted economic growth.

We have now entered the New Year on an optimistic note as the vaccination process has begun fueling hopes of a recovery. However, economic recovery is expected to be slow and laboured and government support will be needed to boost the pace.

So the focus of Budget 2021-2022 could be largely to mend the economy and boost growth and fight inflationary pressures. While the economy came under pressure, the commodities market was also not left unaffected.

We saw sharp volatility across commodities as prices slumped earlier in the year owing to demand destructions but recovered on the back of stimulus measures and robust Chinese buying as is evident from higher commodity imports.

On the backdrop of the challenges for the Indian economy and commodity markets, the following are the Budget expectations that could affect commodities. These expectations are based on various media reports and our interaction with market players.

Reduction/Removal of Commodity Transaction Tax (CTT):


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It has been a long-standing demand by commodity market players to reduce or remove the CTT to boost trading activity. CTT currently stands at 0.01% and according to CNBC reports, Narinder Wadhwa, President of Commodity Participants Association of India (CPAI) said that the government must look at waiving off the CTT.

SEBI has already introduced various changes including the launch of new products to boost participation in the commodity market and the reduction or removal of CTT may further boost market participation.

Agriculture Sector:

The government is expected to accentuate its optimistic goal of achieving self-sufficiency in edible oil in the Budget for FY2022 as well.

Last year, while presenting the budget for 2020-21, the finance minister had urged farmers to make India self-sufficient in edible production but the budget did not allocate any funds regarding the same.

However, this year agriculture ministry has proposed Rs 19,000 crore national mission on edible oil for approval in the upcoming budget. The mission entails a 5-year plan aimed at achieving self-sufficiency in the production of cooking oil while cutting down its increasing import, which costs Rs 75,000 crore to the exchequer annually.

Out of the total annual edible oil demand of around 22-23 million tons, India imports around 15 million tons of oil to quench its consumption requirement.

The market expects the government to levy a cess of Rs 2,500-3,000/ton (Rs 25—30/10 kg) on the import of edible oils. The government has already promulgated plans to promote oil palm cultivation in the country.

Palm oil accounts for more than 60 percent of the total imports. At present, fruit-bearing oil palm trees cover only 225,000 Ha, which may be increased to 325,000 Ha in a year. The government may also consider increasing incentives on oil meal exports to make oilseed farming lucrative Indian farmers (Source: Economic Times & USDA).

Gold import duty:

Another long-standing demand has been to reduce the import duty on gold which currently stands near 12.5%. Indian gold imports fell sharply last year as the price surged to record high levels on the back of higher international price and higher import duty.

While lower import has fared well for the trade deficit, higher price affects domestic purchases and jewellery exports as well. As per a Times of India report, All India Gem and Jewellery Domestic Council (GJC) Chairman Ashish Pethe called upon the government to reduce customs duty from 12.5% to 4% to encourage organized trading.

We, however, do not expect the government to cut the duty as it remains intent on keeping imports low and tap on local gold stocks. Change in import duty, if any, may have a direct impact on MCX Gold prices.

Bullion Sector:

Indian government has taken various measures to formalize the jewellery sector, increase allure for paper gold investment, boost domestic refining, and tap on idle lying gold with households and institutions.

In continuation with this, some more measures may be considered in the Budget. Few recommendations include improving regulations relating to gold loans as it will help improve credit conditions and monetize the idle lying metal, efforts to increase appeal for E-gold through digital literacy and awareness.

There are also talks of the Gold Amnesty scheme under which people will be asked to disclose unaccounted gold and pay taxes on it. Afterward heavy fines will be imposed on the undeclared gold.

However, the industry is concerned about KYC norms for jewellery purchases. Currently, one needs to submit KYC documents if he or she buys gold worth Rs 2 lakh or more.

Jewellers fear that the government may make KYC mandatory for all cash transactions in the upcoming budget. Such a move may dampen demand from small buyers.

While new measures may further improve the domestic bullion sector, its direct impact on gold price is likely to be negligible.

Oil and Gas Sector:

While the Indian government continued to emphasize the clean and renewable sources of energy, reforms in the oil and gas sector are likely to continue.

The oil and gas industry wants the government to work towards its inclusion in the Goods and Service Tax (GST) regime to reduce the tax burden.

With the aviation industry under severe stress due to travel restrictions, the inclusion of aviation turbine fuel (ATF) in the GST regime will help reduce the overall air travel cost.

Market players also expect the government to almost halve cess on domestic crude oil to encourage exploration activity. With increasing emphasis on using cleaner fuels like natural gas, demand is expected to remain high and market players are expecting that after oil, India may now build a strategic reserve of natural gas to further strengthen the country's energy security and shield itself from supply disruptions and frequent price fluctuations.

Also, to promote the use of natural gas as fuel, market players want LNG imports be exempted from customs duty as crude attracts nil duty while LNG demands 2.5% duty.

The policy changes may be targeted towards meeting India’s huge energy demand while meeting environmental goals as well however it is unlikely to have a direct impact on prices.

Base Metals Sector:

The government may tweak customs duties in the Budget next week on several goods and these may include metals like Copper and Aluminium.

In the case of Copper, markets expect to lower customs duties on copper scrap to promote domestic manufacturing and exports while the customs duties could be removed on copper concentrate.

Reduction in import duty of copper concentrate may bring down the cost of production for Copper producers but may not have any direct impact on MCX Copper prices

Meanwhile, in the case of Aluminium, domestic Aluminium manufacturers have urged the government to raise basic customs duty on both the primary Aluminium and Aluminium scrap from present 7.5% and 2.5% respectively to 10%, to rein in the rising imports.

They also want to eliminate GST compensation cess on coal, around Rs 400 per tonne, to support the power-intensive Aluminium industry. (

Except for any changes in customs duty on primary Aluminium, there may be no direct impact on MCX Aluminium prices. Meanwhile any increase in customs duty on primary Aluminium may lead to rise in MCX Aluminium prices.

Amongst others, increased infrastructure spending, sops to boost real estate, and the automobile sector may have a positive impact on domestic demand for metals like Copper, Aluminium, and Lead however may not devolve into any major price movement.

(The author is VP- Head Commodity Research at Kotak Securities)

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
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