Hours before the actual Budget presentation, the government banned futures trading in wheat and rice futures on the National Commodities & Derivatives Exchange. This may be a politically correct step, but it is a retrograde move. Wheat futures were efficiently reflecting the demand and supply and was a good source of price discovery for farmers. And the futures market, with an open interest of 1,00,000 tonnes is too small to impact prices of wheat, some 74 million tonnes of which are consumed in India.
As to the Budget itself, overall, it doesn’t have much in it for food commodities. While the government is concerned about food inflation, it has limited options in a situation where the country, facing lower domestic production, has to depend on imports at a time when global prices of commodities have risen sharply.
Nevertheless, the rise in prices in India is still below that of the rest of the world. For example, while wheat prices have increased by 45% year-over-year, domestic prices are up only by 21%. Similarly, for soy oil, prices are up 30% against a domestic price rise of 16%. So, for those who believe in a liberalized economy, the higher prices here shouldn’t be a sore point. After all, the best the government could have done was to reduce the import duties, which they did with wheat duty going down to zero. However, you may argue it, that duty cut was a bit late.
What will be the impact of the higher education cess, which went up from 2% to 3%? For starters, the cost of sugar will go up slightly. The excise duty on sugar, which is Rs86.70 per quintal, will become Rs87.55 per quintal. This duty increase, albeit small, will have to be absorbed by the consumer. The landed cost of vegetable oils will go up by 1%, though that will be nullified because the CVD of 4% has been withdrawn on all vegetable oils. And the cess hike won’t have any impact on grain and pulses prices.
The reduction in CST from 4% to 3% will have a nominal effect on the food sector as almost all manufacturers have organized their interstate marketing through depot transfers, which attracts no CST anyway. In the case of molasses and alcohol, as there are significant interstate sales volumes, interstate buyers will stand to gain. The import duty on denatured spirit has been reduced from 10% to 7.5%.
This is a welcome step for chemical industry. But, given the substantially higher sugar production, the import of ethanol will remain unviable. Brazilian alcohol prices are hovering around $430 per kilolitre. With freight and the new duty, the import price will be about Rs26 a litre; the domestic price is around Rs22 a litre.
The government did take the welcome step of eliminating the excise duty on biodiesel. This alone will, however, have no impact on the viability of this industry.
What is really needed are explicit subsidies as the cost of production of biodiesel is very high compared with the price the oil marketing companies are willing to pay.
These are his personal views.