27 February 2018 15:02:19 IST

Good tidings for the farm sector

Budget promises better tax treatment, other supports and exchanges for agriculture and commodities

Budget 2018 addressed, to a considerable extent, some of the long-pending issues related to the farm and commodity sectors.

So why does the farm sector need attention and support? Some facts:

The average agri GDP growth over the last four years is 1.85 per cent — half of what was achieved in the 10 years between 2004-05 and 2013-14, at 3.7 per cent.

As per the 70th Round of Situation Assessment Survey of NSSO conducted between July 2012 and June 2013, the average monthly income of an agricultural household is ₹6,426 and expenditure is ₹6,223, leaving only ₹203 in the hands of the farmer.

Bad monsoons only make matters worse. Data indicates that 33 per cent of the cropped area in the country falls under ‘less than 750 mm’ annual rains — classified as low rainfall. Further, the frequency of drought has also increased in recent years. Since 2000, the country has had two to three successive years of drought — 2000, 2001, 2002 and 2014, 2015.

While the monsoon was reasonably good in 2017, farm gate prices crashed owing to excess supply. While the MSP in maize in kharif 2017 was ₹1,425/quintal, market prices were as low as ₹1,050-1,100/quintal in December. Similarly, in urad, while the recommended MSP was ₹5,200/quintal, market prices were ruling at about ₹3,500/quintal in November in Latur, Maharashtra. In arhar (tur), too, prices were sharply down.

Budget dole-outs

Of the many pro-farmer moves announced in the Budget, the highlight is the favourable tax treatment for FPOs (farmer producer organisations). Currently, though farm income is not taxed, farmer groups that organise themselves as producer organisations and register as a company have to pay tax on profits. The Budget now provides for 100 per cent deduction on profits for all FPOs making a turnover of up to ₹100 crore. This will help small producer organisations to save money and invest in growing their businesses.

Further, to provide assaying, grading and other infrastructure facilities at electronic mandis under e-NAM, the Finance Minister, Arun Jaitley, allocated ₹2,000 crore for the ‘agri-market infrastructure fund’. Currently, each of the 470 markets under e-NAM get a cash assistance of ₹75 lakh to set up the infrastructure required. But this is not enough to put in place all the necessary facilities at the mandi.

For the benefit of small and marginal farmers, Jaitley also announced that the 22,000 small agri markets will be developed into Gramin Agriculture Markets and linked under e-NAM. This will help farmers in remote villages benefit from the market price. There also came an assurance of cost plus 50 per cent on all crops.

Commodities market

The Budget amended the Finance Act to bring a change in definition for ‘options on commodity derivatives’. These will be recognised not as a security but as a commodity contract from April 1, 2018. These contracts will thus be subject to CTT (commodity transaction tax) and not STT (security transaction tax).

The CTT to be paid to the seller of an options contract on commodity derivative remains unchanged at 0.05 per cent (of premium). However, the tax to be paid by the purchaser on exercise of a contract has been cut to 0.0001 per cent (of premium) from 0.125 per cent earlier.

A cut in the tax rate may boost sentiment and bring about higher volumes and also encourage exchanges to launch new commodity option contracts in the coming year.

Another key change is that the Budget amended Section 43 of the Income-Tax Act making trades in any agri futures contract non-speculative (this is even if there is no CTT on the contract). Thus, any trader in agri futures/options contract can set off his loss on the trade against business income (if any) and reduce his total tax outgo. Currently, this benefit is available only for commodities on which CTT is applicable — gold, silver, energy and other non-agri and agri-processed commodities.

Gold policy

The Finance Minister also announced that the Centre would soon formulate a gold policy, to prepare the ground for a gold spot exchange. If SEBI is reluctant to regulate the spot commodity market space in gold, there may be a separate body — say, a Gold Board — that may do it. If the current commodity derivative exchanges are interested to launch spot contracts, they may be allowed to do it by setting up a separate subsidiary.

With a gold spot exchange, India – the second largest market for the yellow metal in the world — will set its own benchmark price for gold. In addition to the benefit of transparent pricing, participants in the spot market will also have the assurance of quality and higher liquidity. It will bring more banks and institutional players into the market and deepen it, and one could see the emergence of new, innovative gold-backed products.

Jaitley also indicated that the gold monetisation scheme will be soon revamped. Currently, the scheme has lost its appeal because of several glitches in the process of opening an account and maintaining it.