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India’s link with gold

06 october 2014

When an Indian thinks ‘gold’, the perception goes far beyond the metal as a possession of wealth, an ornament or just a pure investment vehicle. For an average Indian, Gold is ‘security’ - something that no other investment can offer. If one studies the pattern of gold consumption in the country over the years, you can see that the appetite for the yellow metal has always been high, irrespective of what the market news might say. If the occasion demands, nothing can stop Indians from buying gold coins, jewellery, etc. ... even high prices.

Going back to the previous years, India’s struggle with a ballooning trade deficit forced it to impose a record high duty of 10 percent on overseas purchases of gold, the second-biggest expense in its import bill and rules were introduced combining import quantities to export levels.

Since July 2013, India’s gold imports have been recording an average of 24.69 tonnes compared to an average of 78 tonnes before the earlier government brought in the various rules and curbs to set right the CAD. Analysts however, are of the opinion that any policy review and a reduction in import duty as well, could see monthly gold imports of an average of 50-60 tonnes. This would address industry concerns while also keeping the trade deficit in check.

India is currently the world’s No. 2 gold consumer only after China. If the restrictions are removed one can see gold imports by India increase by 50 percent from the current levels. This might give a boost to the global prices that slumped for the first time in 13 years. The 28 percent slump last year can be attributed partly due to India's curbs.

While the first half of 2014 gold imports was rather subdued, the World Gold Council (WGC) and other industry watchers predict that India's gold demand is likely to pick up in the second half of the year as curbs on bullion imports are expected to be eased by the new government.

However, gold analysts’ perception is that the change in gold policy is inevitable because the new government is supposedly pro-gold and that it's just a matter of when the change will take place. But, with the Finance Minister being rather non-committal in the recent meeting with GJEPC’s delegation, it is a cause for concern for the Indian gem & jewellery industry.

And, the new government has always maintained, even in the past, that any action on gold should take into account the interests of the public and traders, not just economics and policy.

Though the Indian gold imports plunged by a fifth last year, there were indications that demand for jewellery and investment rose by 13 percent. As mentioned early, demand for gold in India will remain high irrespective of price or availability. Due to the gap between supply and demand, the premiums in the country shot up as much $100 an ounce over and above the global benchmark. Not surprising then that smuggling saw a renewed spurt.

In its quarterly report, WGC said that gold demand in India fell by 25 percent to 190.3 tonnes for the first 3 months of the year due to the curbs. The report also noted that demand in China, the top buyer, too fell from the previous year's record levels, an indication of the global behavior in the gold sector.

The WGC's Indian Operations is bullish regarding gold demand in India and claims, "We continue to hold 900-1,000 tonnes (of annual demand in India) as it is expected to pick up in the second half”. Shrugging off the sharp drop in demand in the first quarter of this year, WGC reiterates its forecast for India's full-year gold demand to about 1000 tonnes.

The Indian gem & jewellery industry, while confident about the pro-industry stand by the new government, they are understandably not sure as to when the rules regarding gold imports will be relaxed. This uncertainty seems to create a sense of anxiety among the gold business community.

Analysts are however not too convinced that the new government will take immediate steps to ease the rules or lower import duty for gold. They feel that India's trade deficit has been falling in recent months, mainly due to the drop in gold imports. And, in their perception, any step to ease the rules would be taken cautiously. According to an analyst “A possible rollback of the duty on bullion imports may not occur overnight, should it occur at all, but would more likely happen later this year.”

The Government of India slashed import tariff value on gold and silver to $408 per 10 grams and $617 per kg respectively in the month of June, in view of weakness in bullion prices globally. In the second fortnight of May 2014, tariff value on imported gold stood at $424 per 10 grams and silver at $650 per kg.

When the GJEPC announced the annual performance for the Indian gem and jewellery sector for the FY2013-14 in the beginning of June, 2014, declaring a contribution of US$ 34,746.90 million to India's foreign exchange earnings, but with a decline of 11 percent as compared to the last year figures, the dip was attributed to the stringent gold import policy

Due to the Indian government curbs, the country's total gold and silver imports dropped 40 per cent to $33.46 billion in 2013-14, as against $55.79 billion in the previous year. Gold is the second largest import item for India after petroleum. But, the Government had taken several measures to curb gold shipments to address the high current account deficit. These measures include raising the import duty to 10 per cent on the metal and also made it mandatory for traders to export 20 per cent of the imported gold.

Vipul Shah, Chairman GJEPC expressing concern recently requested the Government of India (GOI) in a pre-budget presentation said, “There is an urgent need to re-look into the gold policy. Small jewelers are not getting gold and that India's gold jewellery export has declined by almost 40 per cent due to the unavailability of gold. The import duty on gold should be brought down from 10 to 2 per cent and that the imposition of 80:20 Scheme should be abolished.” 

At the recent ‘Banking Summit 2014’ in Mumbai, organized by the GJEPC of India, G.S. Sandhu, Financial Services Secretary revealed that the Government of India was looking for ways to monetize idle gold. In India, it is said that a huge amount of idle gold is lying with the people, which can be utilized beneficially for the country. The State Bank of India (SBI) also proposed that banks should be allowed to keep gold as part of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). All in all, gold will be playing a significantly important role in India’s economy in the years to come.

Aruna Gaitonde, Rough&Polished, India