spreads. As such, hedging instruments like commodity derivatives are extremely sensitive to costs of transactions. A study in China has revealed that an increase of 0.2 percentage points in stamp duty reduces the trading volume by a third. Similar evidences are available in other hedging markets like forex and interest rate derivatives.
According to a study by Icrier, the proposed CTT of 0.017% in the 2008-09 Budget (which was withdrawn in the next Budget) was supposed to increase the transaction costs by more than 950%. The study examined the relationship between volume, volatility and transaction cost for five selected commodities — gold, copper, petroleum crude, soya oil and chana. It inferred a negative relationship between transaction cost and liquidity, and a positive relationship between transaction cost and volatility, similar to results found in hedging platforms worldwide.
Two other arguments are also forwarded by the proponents of CTT, without any basis. It is argued that future trading creates inflationary pressure in the economy as the speculators use liquid markets to manipulate prices, and, in this way, harm both producers and consumers. The ICRIER study finds that futures trading does not cause inflation, rather it brings efficiency in these markets.
A study by the IIMB observes that the causes of commodity inflation in India were supply side factors, combined with the government policies. Similar views were expressed by the Abhijit Sen Committee in 2008. The committee was of the view that future markets, rather than creating inflationary pressure in the economy, help discover prices and integrate markets spatially and temporally.
The second argument is that CTT can work as an anti-tax evasion measure. It can help in tracking information for better tax compliance. It should be noted that all national commodity exchanges have world-class surveillance systems with proper auditing. Therefore, for suppressing fictitious trading, the need is to give teeth to the FMC rather than imposing CTT. Transparency in commodity future markets depends on information symmetry and level of infrastructure.
Increase in transaction costs due to increase in taxation leads to decrease in trading volume in the security exchanges also. Evidences from the Tokyo, Shanghai and