Impact of Organized Retailing on the Unorganized Sector

Trading in commodity derivatives on exchange platforms is an instrument to achieveprice discovery, better price risk management, besides helping macro-economy withbetter resource allocation. Since the inception (2003) of national online trading onmulti-commodity exchange platforms, the trade volumes have grown exponentially.In the union budget 2008-09, the government has proposed to impose a commoditytransaction tax (CTT) of 0.017. Though the stated rationale for imposing highertaxes is to contain price rise and volatility, to generate revenue, and to increasetransparency, these arguments are debatable and not much rooted in the availableliterature. In this context, we examine the relationship between trading activity,volatility and transaction cost using a three-equation structural model for five topselected commodities namely Gold, Copper, Petroleum Crude, Soya Oil and Chana(Chickpea). Results suggest that there exists a negative relationship betweentransaction cost and liquidity, and a positive relationship between transaction cost andvolatility. Therefore, if the government imposes CTT, it would lead to highervolatility and lower trading activity affecting market efficiency and liquidity.However, agricultural commodities such as refined Soya oil and Chana are leastaffected in terms of volume and volatility in response to the imposition of transactiontax. Increased volatility may lead to more speculative activity and fail to achieve theprice discovery and resource allocation objectives of the commodity markets. Further,the granger causality results reveal the efficiency of futures markets but do notprovide any conclusive evidence about the nexus between price rise and futurestrading.