India?s gold policy seems to have come a full circle. Or should we say it is back to square one. After the repeal of the Gold Control Act in the early 1990s, and steady liberalisation of policy measures for nearly two decades, the government has moved in the opposite direction over the last few months by hiking import duties and imposing massive controls on the import of the yellow metal. The latest 2 percentage point increase in the import duty to 8% means that the cess imposed on the yellow metal has soared 800% in under 18 months. Gold now attracts 8% import duty, and this burden is in addition to a slew of other recent policy measures that have already made it extremely difficult for all those who are in businesses related to the precious commodity.
Serious steps are required to curb the ballooning CAD and stabilise the rupee, and reducing the gold import bill could help achieve this. But are the initiatives taken by the government a right move? The answer, clearly, is no. The government seems to have failed to identify the two distinct component parts that constitute gold demand?jewellery and investment. Both are interlinked in a sense, yet have their specific characteristics, and a policy prescription that fails to see both the inter-linkages as well as the distinct features could well be doomed to failure.
Since 2002, the consumption of gold by the investment sector started to rise significantly. From a mere 15% of total consumption during 2002-04, the figure has soared to 35% during 2010-12. In this period, the price of gold has risen nearly 600%, from an average level of R4,500 in 2002 to about R27,000 currently. As a result, gold imports have risen exponentially. During the same period, the share of jewellery in overall gold consumption fell from about 84.3% to under 65%. But, in volume terms, the jewellery consumption demand has been steady between 500-600 tonnes annually despite price hikes, import duty hikes and other government measures.
This is because of the deep-rooted affinity that Indians have for purchase of gold, especially jewellery and ornamentation. Over the years, ornaments purchased for religious or cultural reasons have also proved to be useful as a safe and liquid investment, appreciating in value over time, yet easily convertible into cash at short notice. An additional though not often considered fact is that jewellery is one of the few asset classes which is quite literally in the hands of the woman.
By seeking to curb gold imports, the government is, on one hand, indirectly encouraging the return of illegal imports which were rampant during the period of the Gold Control Act. On the other, it is equating demand from the jewellery sector?which is productive and adds value to the raw material, thus generating employment for millions of artisans and employees in the small and medium sector, and adding to government revenues?with investment demand, which has little ripple effect.
In the interest of encouraging the growth of the jewellery industry?a massive all-India edifice that provides employment to nearly 4.5 million people?other avenues need to be explored. One example is the establishment of gold accounts to meet demand from a growing jewellery manufacturing sector without any increase in imports.
By modifying the existing gold deposit and gold loan schemes being run by banks, the government can ensure that instead of jewellers borrowing on a consignment basis in the international markets, the gold purchased by retail investors can be leased out to the domestic jewellery industry. This will not only lead to a drop in the gold imports by jewellers but also ensure that hitherto unproductive investment in gold fuels growth of the jewellery trade leading to greater employment and added revenue for the government.
In the long run, only this approach will ensure that the import bills are reduced without affecting the jewellery industry. Other Asian countries have taken this route with some success. Can India not do the same?
The author is president, Gitanjali Gems Ltd
The panic was clearly evident among the Reserve Bank of India (RBI) and the government on the ballooning current account deficit (CAD) due to a spike in gold imports. It?s not their only mistake to misjudge the Indian consumer behaviour towards gold, but majority of the analyst community has got it wrong.
At the beginning of 2013, there was more or less consensus on the possibility of a sharp decline in global gold prices, which should have helped our CAD to reduce significantly and stabilised the currency and, in turn, kept the macroeconomic fundamentals of our economy on a strong footing. But the consumer surprised everyone after the largest dip in gold prices in more than a decade in April. Customers queued in front of the jewellery shops to grab their share of the precious metal, which catapulted the imports to an all-time high of 162 tonnes in the month of May.
Although the government and RBI have been working on this problem for some time now, the measures announced over the last few months have been unprecedented. Amongst all of them, the least worthy and more a counterproductive was the increase in the customs duty. With the rising customs duty, the cost of gold increased for the domestic consumer when they compare the landed price to the selling price. But we all know that we never look at what constitutes the gold price; all that the consumer knows is today?s gold price and whether she should buy or not.
It is pretty clear that the price was one of the catalysts in driving the gold demand as investment demand was driven by rising prices, and to some extent the investors were helped by the increasing customs duty as the worth of their gold holdings rose to the extent of 8% just because of the increased customs duty. This implies that the customs duty increase has no impact on demand whatsoever.
The other measures include making things difficult for jewellers, such as discontinuing the 180-day lease schemes, which are funded by multinational banks or domestic institutions, where the price risk is not transferred to the jeweller and payment is done once he sells the metal. The second one is importing gold against 100% paid LC, which would increase the cost of import as at least 12-13% would be the funding cost. This also means that the jewellers added significantly to their inventories in the recent months as many large jewellers have expanded their network significantly.
Due to these new requirements, it would certainly hurt their working capital requirements, which would force them to reduce their inventories to cope up with the capital pressures.
Apart from this, the months of April and May saw extraordinary demand spike, which was caused by the postponement of purchases between January and March, and also a sense of rush set in due to the sudden drop in prices. But this demand is certainly not sustainable and would return to normal levels, and we are entering a lean period for demand as rural India starts to sow its crops. Anyway, the end of wedding and festival season causes a natural drop in demand.
Second, the major fall in gold prices in India?which came after more than a decade?has caused the investors and consumers to grab gold, but if the decline in prices becomes sustainable then it would dampen the sentiments of investors as well as consumers and would reduce the overall demand significantly.
And with the jewellers trying to use up their inventories, the imports should see a significant drop. I assume the imports for the month of June would fall to 60 tonnes, and for July and August, the purchases from overseas should come down to as low as 30 tonnes per month.
The author is associate director and head, commodity & currency, Motilal Oswal Commodity Broker Pvt Ltd
