Gold: The glitter will continue

Gold is said to be the most-favored investment instrument in India. In year, 2011, India imported 969 tons of gold, which was much higher than the previous year. In every Indian wedding gold shares a major part of total bill and it is regarded as women's most secured treasure. India's main gold suppliers are Australia and South Africa.

What changes the budget proposes?
Considering the fact that one of the prime reasons of India's current account deficit was around 50 per cent increase in the imports of gold and precious metals, in the Budget 2012-13, the honorable finance minister, Mr. Pranab Mukherjee proposed to increase the basic customs duty on standard gold bars, gold coins of purity exceeding 99.5 per cent and platinum from 2 per cent to 4 per cent. Furthermore, the duty on non-standard gold has been proposed to increase from 5 per cent to 10 per cent. Added to that, the finance minister proposed to enhance basic duty on gold ore, concentrate and ore bars for refining, from 1 per cent to 2 per cent. In addition, duty on refined gold is proposed to increase from 1.5 per cent to 3 per cent. In short, FM has proposed to double the duties on all forms of gold.
What is the impact of the same on prevailing gold prices and demand of it?
The increased customs duty on gold is expected to result in 1.96 per cent increase in the cost of imported gold. This hike, based on the current market price of gold in India, is expected to lift the cost of gold by additional INR 550. As the precious yellow metal was already a far end of the common man's reach, the current hike in customs duty has further extended the distance. With this, there may be a slight decline in demand of gold from lower middle class. However, this decline is expected to be more than offset by the demand from affluent class. With this, the enhanced customs duty is unlikely to have a significant impact upon the growth in demand of gold.
What would be the impact on gold trade?
On the prima facie the hike in duty is expected to hold a mild negative impact on the Indian gold trade, it is definitely going to result in a shift of trade with the countries where India, as a country, has entered into free trade agreements and who have a low duty on gold. Currently, India has entered into free trade agreements with the following countries / blocks:

• South Asian Free Trade Agreement (SAFTA) — Members include Bangladesh, Bhutan, Nepal, The Maldives, Pakistan, Sri Lanka and Afghanistan.
• Association of Southeast Asian Nations (ASEAN) — Members include Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Myanmar, Cambodia, Laos and Vietnam
• Sri Lanka
• Thailand
• Malaysia
• Japan, and
• South Korea

Furthermore, the country may finalize these agreements with European Union, European Free Trade Area, and Canada in near term. Added to that, the free-trade agreements are separately made with Thailand and Malaysia other than the agreement under ASEAN. Under these agreements, the trade between these countries attracts either no duty or duty at concessional rates. For example — If the gold is to be bought from a country such as Thailand, with whom India has a free-trade agreement, will attract concessional custom duty of 2 per cent compared with the newly proposed 4 per cent. As a result, a gold trader, jewellery manufacturer, by just shifting his trade to the countries, with whom India has free trade agreements, can avoid paying additional duty on gold, which he has to pay if he sources the gold from India. With this the gold source from these countries is expected to remain cheaper for him than the gold purchased in India. Consequently, such purchase could yield a healthy return for him depending on the quantity imported.
What does this mean?
The exercise and example provided above clearly indicate that the gold sourced from the countries, with whom India has free trade agreements coupled with concessional duty arrangements on gold, is likely to remain cheaper than the gold procured in India. As a result, it is beneficial for a jewellery manufacturer, gold trader, gold dealer situated in India to Import gold from the countries such as Thailand and Malaysia rather than procuring the same in our own country. The reason for the same remains that in such case, the cost of gold is likely to remain insulated from the current hike in customs duty on the precious metal. With this, it can be easily presumed that the glitter of the gold is likely to remain and shine further the way it excelled in the past.