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Informist, Friday, Aug 2, 2024

 

By Sayantan Sarkar and Sandeep Sinha

 

NEW DELHI/MUMBAI – The Indian gold market, which has often suffered from big price disparities, is breathing a sigh of relief after the government slashed the basic customs duty on the precious metal. This will benefit the gold industry and is likely to give a major boost to local demand, analysts and industry officials said.  

 

Unlike other major consuming countries, India applies over four to five distinct duties to precious metals imports, including separate rates for refined bullion and gold-silver dore, alongside varying rates under different free trade agreements. "This complex system has often led to significant price disparities in the local market and steep discounts on the international price," Metals Focus said in a report. Gold prices in India experienced discounts as high as $70-$80 per ounce in mid-July, it said. 

 

After the government reduced the basic customs duty on gold to 6% from 15% in the Union Budget for 2024-25 (Apr-Mar), the local price has moved from a deep discount to a premium of $5-$10 per ounce. The duty cuts will help improve market efficiency, Metals Focus said. 

 

Most analysts believe gold demand in the country is likely to rise significantly in the coming weeks even before the festivals and wedding season kick in. July and August are usually considered dull due to the absence of any auspicious days in the calendar, with buyers preferring to time their purchases to religious occasions. "As gold becomes cheaper, more consumers may invest in gold jewellery, ornaments, and other gold products, leading to a rise in consumption," said Prithviraj Kothari, managing director of RiddiSiddhi Bullions. 

 

According to estimates by Metals Focus, retailers in India anticipate a 30-40% rise in demand from current levels in the coming months as they build inventory amid higher demand for the yellow metal. "Lower duties are beneficial for jewellers in the long run as lower gold prices can stimulate demand, leading to higher sales volumes for jewellers. This can be especially beneficial during festival seasons and weddings, which are peak times for gold purchases in India," Kothari said. 

 

The duty cut is also likely to benefit refiners and importers as well. With the increased demand for refined gold, domestic refiners may invest in expanding their facilities and adopting advanced technologies, thus improving the quality and efficiency of refining processes. 

 

Moreover, investors could allocate 10-15% of their portfolio to gold, depending on one's risk appetite, as this helps to diversify and act as a hedge against inflation, said Parul Maheshwari, a certified financial planner. Maheshwari believes that for investors who have a very low allocation to gold in their portfolios, the cut in import duty presents a golden opportunity for them to increase the share of the yellow metal.  

 

Though there is no denying that the reduction of basic customs duty on gold is a positive step for the bullion industry in India, the short-term impact of the decision could still hurt retailers and jewellers across the country. "Their stock value came down drastically...they might have to sell some jewellery at lower rates than the purchase price," Kothari said.

 

Even if jewellers have to bear the pain of loss of inventory value in the near-term, they are optimistic about sales. Metals Focus believes the loss of inventory value for jewellers and retailers across the country could be offset by increased consumer demand. "We also believe that the retailers may not pass the entire duty benefit to the consumers or raise labour charges on jewellery to cushion the losses they incurred on their inventory," it said. 

 

We have seen a rise in customer buying after the duty cut as they fear the price will rise again, said Kumar Jain, owner of Umedmal Tilokchand Zaveri. Jewellers are ready to cater to increased demand and on the basis of that expectation, they have called back workers from villages as they will get more work, Jain said. 

 

Meanwhile, Metals Focus estimates roughly 150 tn of gold came through illegitimate channels last year and supplying illegal gold to India costs about 4-5% of the customs duty. With the lower duty, the incentive to bring gold from an illegal route will become less attractive. "As the gap with the UAE is now almost eliminated, this is likely to weigh on inflows of in-flows of such jewellery into India which often is exchanged for local jewellery or converted into bullion," it said. India has a Comprehensive Economic Partnership Agreement with the UAE that came into effect in May 2022.  End

 

US$1 = 83.75 rupees

 

Edited by Aditya Sakorkar

 

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