Bullion duty hike draws ire
ALL THAT glitters is not gold right now, quite literally. The strike by jewelers, sudden halt in gold trading and a standstill in gold imports — all within a week in a country which is the world’s largest gold consumer — has not only affected the price of yellow metal but also its demand in domestic and international markets.
India accounts for more than a quarter of global consumer gold demand followed by China. In year 2011, gold imports increased 50 per cent to nearly 1,000 tonne with merely 2 tonne of gold produced domestically. The country imported 967 tonne of gold in 2011.
While gold prices dropped to a narrow $1,636 to $1,670 an ounce, the lowest price since January in London, the April-delivery contract dropped 0.8 per cent to $1,636.50 an ounce on the Comex in New York on Thursday.
Also the gold futures have declined 1 per cent since last Friday, when finance minister Pranab Mukherjee announced to double the import duty on gold to 4 per cent and instituted a 0.3 per cent tax on most gold jewellery sales.
Industry experts say that the strike in India to protest against a tax hike on bullion imports, jewellery industry may lose as much as $20 crore per day.
“Presently the gold business in country is at a standstill and nothing is going on,” said Bachhraj Bamalwa, Chair, All India Gems & Jewellery Trade Federation.
Maharashtra and Gujarat account for about 70 per cent of India’s bullion trade. Jewellers in Maharashtra remained shut on Thursday.
“During the strike, shipments were not being handled at the docks. They are not being transported to manufacturing facilities. Smelting plants are not being run. Jewellery is not being manufactured and the inventory on the shelves is being sold at a premium,” said Bamalwa.
With the new taxes on India’s gold imports, industry experts believe there’s both a short-term and long-term scenario. “It is likely that gold demand will fall, as domestic consumers adjust to the new gold price.
"Its allure and appeal isn’t something that will simply disappear, just because the government has imposed higher duties to cover a budget shortfall”
Over the longer-term, however, gold is deeply ingrained within the Indian culture. “Its allure and appeal isn’t something that will simply disappear, just because the government has imposed higher duties to cover a budget shortfall,” said an industry expert.
“This is the second time in 2012 that the government doubled the import tax on gold bars, to 4 per cent of value, raising the cost by more than Rs 1,000 per 10 grams,” said Rajiv Jain, Chair, Gems and Jewellery Export Promotion Council.
Prithviraj Kothari, President of the Bombay Bullion Association, said the levies could cause India’s annual gold demand to fall more than 30 per cent to 600 tonne, and local gold prices could rise. “Imports have almost stopped.” He pointed that worldwide no such duty is imposed on bullion. “There is no duty on bullion in Dubai, Singapore and UK.”
“The government is seeking to raise revenue to plug a budget shortfall. It also wants to encourage Indians to diversify into other investments, like stocks,” said finance secretary RS Gujral recently.
The net purchase of nearly 1,000 tonne of gold over the last year has placed approximately $60 billion worth of Indian rupees on the forex market. The outflow of rupees has forced the government to take action to constrain domestic gold purchases as they rebalance their foreign reserves. The current-account deficit, a measure of a nation’s indebtedness to foreign creditors, has been rising as India’s gold imports outpace its earnings on exports, raising questions about India’s ability to manage its debts.
“All these taxes could lead to big chaos,” said Dinesh Jain, director of the All-India Gems & Jewellery Trade Federation.