Impact of The Budget on The Commodities Market

The art of balance plays a key role in each and every aspect of one’s life, most importantly all financial decisions that have a bearing on the life of an individual. The application of this art is successfully incorporated in the Union Budget 2012-13, with the government focusing on all important areas of the economy, in order to bring in holistic growth. While the focus has shifted from reducing inflation to mainly curbing the current account deficit, other areas like power sector, aviation, agriculture, infrastructure, education, equity investments were also given equal weight-age. 

With the drop down in the Securities Transaction Tax (STT) by 20 percent on delivery transactions and the exemption of Rs50,000 for retail equity investors with a lock-in period of three years has also come in as a boon to the domestic markets amid the already volatile global financial markets. However, no move with respect to the Commodities Transaction Tax (CTT) was proposed which would be positive for growth of the commodity markets.

In the commodities space, major focus by the government was seen on the precious metals front with the increase in customs duty on gold imports, this being a negative move for physical gold demand. But in case of silver, branded jewelry was exempted from excise duty, thus providing a relief to silver retailers. The move to increase custom duty on gold imports from 2 percent to 4 percent would help to contain the current account deficit which has ballooned over the past few years. Due to this, we expect traditional and physical jewelry demand to witness slowdown and therefore physical demand for gold could take a hit. The impact of downside pressure in demand could be seen on prices trending lower in the near-term but from a longer term perspective the impact of this on prices is expected to be subdued.

Although from the agriculture commodity market perspective no significant move was seen, this Budget still focused on the priority sector. The Finance Minister raised the Agricultural credit by Rs. 1 lakh crores to Rs.5.75 lakh crs in 2012-13 and proposed to increase the farm outlay by 18 percent to Rs. 20,200 cr. Subsidy which accounts for a major share in expenditure has been ever rising, particularly in Food and Fertilizers to Rs.750 billion and Rs. 609.7 billion respectively. The much awaited Food Security Bill is before the Parliamentary Standing Committee and computerization of the Public Distribution System is being created which would be operational by December 2012. 

This is likely to improve the procurement of the food grains in the coming years. A major boost to the agriculture sector was announced on the productivity front with special emphasis on development of plant and seed varieties that can yield more and also resist climate change. This would create a breakthrough in the Indian agriculture market and help sustain the ever-rising population and for this purpose the government has set aside a fund of Rs200cr.

The impact of this year’s budget on the domestic markets will be largely positive with major relief given to sectors like infrastructure, power, aviation, coal etc. Sentiments are expected to remain positive on hopes that these measures proposed by the government will help to bring about a positive move towards a new change in the Indian economy. Last but not the least, this budget has catered to most of the categories, thus keeping the satisfaction levels alive!!

Mr. Naveen Mathur
( Associate Director – Commodities & Currencies )