Has fear, uncertainty around GST contributed to fall in crop prices?

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New Delhi: Fear and uncertainty around the rollout of goods and services tax (GST), in addition to a bumper harvest and demonetisation, has contributed to a sharp drop in farm commodity prices in the past few months, according to traders, analysts and an NCDEX commodity exchange report.

Currently, a significant volume of trade in wholesale agriculture markets is in cash and escape taxes. However, after GST rollout from 1 July, such trade will not be possible, and so traders have been liquidating their stocks purchased earlier at discounted prices, including stocks purchased immediately after note ban using old currency.

The fall in farm gate prices in the past few months fuelled farmers protests across several states with demands for remunerative crop prices and farm loan waivers.

“Significant trading volume in physical markets takes place in cash and find the way to escape from the prevailing taxation system,” the NCDEX report said, adding, “with the commencement of the GST regime, it would be difficult to show such transactions which were not usually disclosed in the inventory or mandi (wholesale market) stock disclosures. According to market feedback, such kind of traders are in panic and desperately want to liquidate their stocks as early as possible even at a discounted price.”

The distress selling is causing a significant impact on prices, the report added. Data on wholesale food inflation showed a sharp fall in prices between March and May this year (see graph), going beyond the price crash in November and December last year, following the demonetisation-induced cash crunch, coupled with a bumper kharif harvest.

“Immediately after demonetisation, a lot of cash in old currency seems to have flowed into purchase of farm commodities such as grains and pulses. So in November and December, we did not see the price correction that a bumper kharif harvest should have led to,” said Prerana Desai, vice-president, research, at Edelweiss Agri Services and Credit. With GST, all trade will come under the radar, and it could be that these stocks are being liquidated now, she added.

The NCDEX report also said that the fear and panic among traders have led to a sharp reduction of speculative money flow in the form of investment demand in the past few months.

“Lack of fresh buying support by stockists and traders has further added to the weak undertone of the market,” it said.

Traders are clearing stocks and not purchasing from mandis due to a lack of clarity on GST rates, said a person involved with trade and milling of pulses, requesting anonymity.

“For instance, branded pulses will attract a 5% GST rate, but there is no tax on loose pulses. Now, a miller who packs pulses in a 50kg stamped bag and supplies to wholesalers or retailers is unsure whether it will attract taxes (as the pulses can be both sold under a brand name or loose at the retail end),” the person said.

The problem is severe for oilseeds like soybean. According to the GST tariff schedule, while soybean will be taxed at 5%, two of its processed products—oil and soy meal—are taxed differently, 5% on edible soybean oil and zero taxes on meal which is used as an animal feed.

“How will the processing industry recover the taxes it paid on soybean while selling the meal at zero taxes?” asked D.N. Pathak, executive director at Soybean Processors Association of India.

He added that the rise in domestic soybean meal price, coupled with cheaper imports, will hurt the processing industry. “This will lead to a further dip in prices for farmers which they are already selling below government announced support prices.”