Will Gold Shine Again
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Gold, along with silver, has been one of the most important categories when it comes to imports and is next only to petroleum and similar products. In 2009-10 fiscal it amounted to 10.30 percent of the aggregate imports. In 2003-04 the total worth of gold and silver imported by India was INR 31506 crores but in 2004-05 the value shot up to INR 50098 crores, which meant a growth rate of 59.01 percent.
Since then, the next 3 fiscals saw a gradual and consistent rise in the amount of gold and silver imported. During 2008-09 however there was a 39.67% increase in the value of gold and silver imported with an aggregate worth of INR 100467 crores. This trend has been there in 2009-10 as well.
The following table provides a graphical representation of the same:
| Year | Aggregate value in INR crores | Share in total exports |
|---|---|---|
| 2003-04 | 31506 | 8.77 |
| 2004-05 | 50098 | 10 |
| 2005-06 | 50108 | 7.59 |
| 2006-07 | 66272 | 7.88 |
| 2007-08 | 71934 | 7.11 |
| 2008-09 | 100467 | 7.31 |
| 2009-10 | 140440 | 10.3 |
India gold import in 2011 and what can be expected in 2012
In the final quarter of 2011 India saw a 44% decrease in its gold imports due to unprecedented prices that have significantly the common Indians’ keenness to purchase gold. The World Gold Council has stated that in 2012 too the level of imports will stay the same.
The industry group has stated that in the final 3 months of 2011 there was a decrease of 157 tons in gold shipments heading to India, which put it behind the demand for gold in China in the same period.
However, for the entire year India still imported 969 tons of gold, which was 1.1 percent more than the figure for gold. This meant that the south Asian country was able to keep its position as the leading global market for gold.
In the last quarter of 2011 demand for gold jewelry also reduced 103 tons, which was a reduction of 44 percent. Demand for investment in gold also came down to 70 tons signaling a reduction of 38%.
Ajay Mitra, who works as the Managing Director of India and the Middle East division of the World Gold Council, has stated that in 2012 too the patterns will be similar. He has told the media that he expects the demand to remain steady as he does not foresee any major change soon enough.
He has emphasized that the following factors could have a say on the levels of gold demand in India in the years to come:
- variation in currency value
- government policies regarding gold
- international prices of gold
Mitra feels that several small and medium firms, which have extra cash reserves, will be putting their money in gold funds being traded at the stock exchanges. He has stated though that demand for gold jewelry could be lessened a bit by the fact that the number of auspicious days in 2012 is lesser than in 2011.
The World Gold Council opines that in 2012 China will leave India behind as the biggest consumer of gold products in the world but says that India will still play a major role in the global context.
Indian government policy for gold exchange
During 1990-91 India faced a crisis regarding balance of payments and the critical policies, applicable for the external sector, were reviewed. The policies regarding gold were pretty restrictive and were not able to achieve the pre-determined objectives. Gold smuggling had become a common phenomenon and the connection between gold smugglers, top criminals, and hawala operators was becoming stronger.
The Gold (Control) Act, 1968 was repealed in 1990 and the gold related provisions of the Foreign Exchange Regulation Act (FERA) 1973 were done away with in 1993. Both these steps were the first major changes when it came to gold policies.
The FERA placed gold and silver on the same level with foreign exchange with regards to purposes of exchange control. The federal government now also had the power to place restrictions on disposal and use of gold and silver and such deals. This could be done before or when these items were being imported.
The government also allowed the NRIs to get in 5 kilos of gold as part of the baggage once in six months. This could be done by paying INR 220 for 10 grams. The limit has now been raised to 10 kilos. The main aim behind this move was make sure more gold came into India through the official way. The other way in this regard was to issue special import licenses of SILs that were to be used only for exporting jewelry.
During the late 1990s the government removed the connection between its anti-black money policy and gold. This was also an important policy change in this regard. As per the new stance the income tax structure was to be rationalized in order to deal with the problem of black money and there were going to be several incentives for declaring property that was yet to be accounted.
The Committee on Capital Account Convertibility has, till now, made the most progressive and accurate recommendations for liberalizing the gold market in accordance with the reforms process that was in operation during early 1997. It had stated that for the gold market to improve the capital controls had to be removed as well, because of the connection between the two phenomena.
It suggested the following measures to come up with a properly regulated and transparent gold market that will be incorporated with the other fiscal markets:
- doing away with curbs on gold import and export
- developing markets for financial and physical gold
- developing financial instruments related to gold
- allowing banks and other financial organizations to take part in the gold market
This program is yet to be successful though, due to lack of sufficient public support. It has also not been possible to mobilize gold through gold loans to jewelry makers. The Foreign Exchange Management Act (FEMA that came into force in 1999 has also been a major step in this regard as well.
Recent changes in gold duties and effects on gold imports
The national government has opted to increase the import duty for gold by 2 times to 4 percent and this is expected to reduce gold imports significantly. The demand in India, especially for products like jewelry, will be reduced substantially. India is presently one of the leading importers of gold globally but that is likely to change as well.
The Union Finance Minister, Pranab Mukherjee, has made the proposition in his speech for the Union Budget 2012-13. He has stated that one of the major causes of the latest current account deficit is the approximately 50% in gold and precious metals import in the first three quarters of 2011-12.
The President of Bombay Bullion Association, Prithviraj Kothari, has stated that this step will be detrimental for gold demand. He has said illegal procurement of gold will now increase. Statistics from the World Gold Council have revealed that in the previous fiscal the investment demand for gold was 366 tons and the jewelry demand was 567.4 tons.
Dealers of physical gold have stated that Indians have been purchasing gold but the volume has diminished. The situation regarding global prices of gold has been bringing down demand for gold in the country.
By February end in 2012 the spot prices of gold were 1790 dollars per ounce and this was the maximum price of gold this year so far. Kothari has stated that Indian organizations such as Rajesh Exports, Gitanjali Gems, and Titan Industries will face problems with their jewelry exports because of their substantial input expenses.
The stocks of these companies have already seen a decline of 1.5-3 percent. However, some companies are of the opinion that the increase will not have a major effect on gold demand in India because here it is both an embellishment and an investment. The fund manager of Quantum Gold Fund, Chirag Mehta, has opined that the long term demand of gold will not be impacted too much as a result of this decision.
The Union Government had in January 2012 increased the gold import duty by 90% and so the latest hike comes as a bit of shock for the participants of the gold market. Gnanasekar Thiagrajan, the director of Commtrendz Research, has stated that if the imports increase there is a possibility that rates will be increased again.
Change in strategy of Indian jewelers and its effects on Indian economy
Several Indian companies have already found a way to import a lot of gold in spite of the increase in gold duty. They are looking at countries such as China and Thailand which are already the main suppliers to retail stores across India. Buying gold from these countries is a less expensive proposition and in the present situation the jewelers are buying the maximum possible amount from these and other countries.
India has a free trade agreement with Thailand and this means that gold imported from that country can be subjected to a duty of 1% only. Thailand, on its part, too has tried to make the most of this situation by propagating its long term gold program. In reality it is not a top notch producer itself but is acting as the route for importing gold from Malaysia and China.
Manish Bahl, a Zaveri Bazaar based bullion trader has stated that with education cess the increased import duty for gold comes to 4.12 percent. Combined with an excise rate of 0.3% on jewelry, it is enough to make jewelry making a not so viable option.
Sanjay Kothari, the Gems and Jewellery Export Promotion Council vice chairman has revealed that the case of gold import duty represents a major inconsistency and the organization has informed the national government about the same. This is being done so that any misappropriation can be avoided.
Some traders have also revealed that jewelry imported from Thailand could be melted and sold in Indian markets in case the designs failed to achieve popularity. They have also opined that if some countries held advantage regarding business taxation they shall always be taking undue advantage of it.
The Indian government is presently considering raising this rate to 4 percent in order to address the above mentioned problems. A customs duty of 1 percent shall also be imposed.
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