Indian jewellers stockpiled gold before new tax set in; festive season augurs well for demand, says WGC

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A gold jewellery shop in Mumbai's Jhaveri Bazaar

By Shekhar Ghosh

Gold demand in India jumped by 37% this quarter against corresponding three months of previous year, but it will still hold below a five-year average in 2017, the World Gold Council said.

“I see consumption this year to be between 650 and 750 tonnes this year, compared with the annual average of about 850 – 900 tonnes in the previous half decade,” P.R. Somasundaram, managing director of WGC India, told a press conference.

Gold demand was 666.1 tonnes last year, and totalled 857.2 tonnes in 2015. “In fact, it is the low base of last year, thanks to demonetisation, that makes the jump of 37% this quarter look good”, he added.

The goods and services tax (GST) for gold was fixed at 3 per cent, slightly more than what the industry expected. As the industry adapts to the new tax, both consumers and traders are continuing to adopt a wait-and-watch policy before things settle down. “The uniform goods-and-services tax (GST), which was implemented last month, is a major transition that will take about six months to streamline,” said Somasundaram.

India’s gold imports is also likely to drop in the second-half of the year, as jewellers had rushed to stock up ahead of new taxes introduced on July 1.

“Expecting higher taxes, certainly some of the imports and some of the demand from the second-half were advanced in the June quarter,” said Somasundaram.

Good monsoon to boost demand

As part of a new nationwide sales tax regime introduced in July, the goods and services tax GST on gold jumped to 3 percent from 1.2 percent previously. Jewellers have to pay that tax when buying gold imported by banks, while their customers must also pay when making purchases.

India is an important source of demand in the global gold market, and it’s the second year in a row that policy changes may have restrained sales. In 2016, consumption was undermined after the government banned higher-denominated currency to boost financial transparency and bring unaccounted cash back into the banking system. This year, consumers are adjusting to the tax overhaul, and the new notification to ban any cash transaction above Rs 2 lakh.

Gold inventories are plentiful at present, and consumers who’ve recently purchased are unlikely to do so again in the short term, the council said the report. As the market digests this gold, and adapts to the new tax system, the environment should become more settled toward the year-end, it said.

India imports almost all the gold it consumes. Flows from overseas more than doubled to 248.5 tonnes in the three months to June, while demand rose 37 per cent to 167.4 tonnes, on fears and apprehensions about GST.

“We will see things settling down after re-monetization, but there will still be that hesitancy about buying gold under the transparent system that is now playing out,” Somasundaram said.

However, the third successive year of good monsoon, which will boost rural incomes, added to the impending festive season should see an increase in demand in the second half, he said.

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