India’s decision to cut import duty on gold to reduce smuggling – traders

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India’s move to cut the import duty on gold and silver to 7.5% from 12.5% will help to reduce smuggling and also spur consumption of jewellery in a limited way, traders said Tuesday.

Despite the 5% reduction in customs duty, effectively this amounts to around a 2% lower duty because of the imposition of an agriculture and infrastructure cess. 

This would mean a price reduction of Rs 1,000-1,200 per 10 grams on gold, which has brought the price down to around Rs 50,000/10 grams.

“Gold consumption is likely to pick up substantially only after August, which is when the wedding season and the festival buying season begins,” said Haresh Acharya, director at Parker Bullion, one of the country’s largest bullion retailer.

“Currently, you can’t have even 200 people assembled at weddings because of covid,” he added.

Acharya highlighted  that the level of duty relief is unlikely to trigger any significant buying rush.

While there was a premium on gold prior to the budget, there was a discount on silver even before — which means the duty cut only would have an impact on gold.

Gnanasekhar Thiagarajan, director at Commtrendz Risk Management, said that the gold purchases are currently down at half of what it was.prior to covid so the duty cut would give an impetus to buying.

“So far the government has not been favouring the bullion industry and they never wanted gold imports to rise because it can create a current account deficit,” he said.

Duty cut a surprise

“So the duty cut comes as a huge surprise to everybody because most people were expecting an increase in duty because government revenues are strained,” he added.

Thiagarajan concurred that the move appeared more aimed at stopping smuggling.

Harmesh Arora, gold and solver refiner, said that buying had started picking up gradually in the past few days as movement curbs in the wake of covid has started being relaxed.

“Retailers who might have earlier been attracted to smuggled gold may curb their unofficial buying due to the duty reduction.

Spot gold prices shot up to around 57,000 rupees per 10 grams in India when prices climbed to record highs internationally in early August last year.

Since then, international prices have fallen from above $2,000/ounce to below $1,900.

“The covid has had a big impact on gold consumption. People have lost their livelihoods or their earnings have been curtailed. Under the circumstances, only the rich have been buying gold,” Arora said.

The reduction in international price has stoked limited buying interest recently. Traders welcomed the Budget’s proposal to set up a spot gold exchange which will facilitate gold buying and selling. 

India, one of the world’s largest gold importers, currently routes purchases through banks or refiners. Most of the gold requirement is met through imports.

Arora said the exchange will ease up both buying and selling of gold in the country.

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

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