A 10% import duty on gold and stringent conditions for purchases from overseas to trim a runaway current account deficit (CAD) have encouraged smugglers to look for innovative ways to beat the customs staff. The curbs drove up premiums and made domestic gold rates up to 23% costlier than the benchmark London prices.
This, however, is set to change. Jewellers said the latest steps by the central bank of allowing banks to offer gold loans and permitting more entities to import the precious metal are the first in a series of measures the new government is expected to take to ease gold supplies, which could drive up the overall demand by 5-7% in 2014 from last yearís level of 975 tonnes.
This means the Indian demand could exceed the World Gold Councilís (WGCís) latest forecast of 900-1,000 tonnes for 2014, they added.
"I expect jewellery demand to rise this fiscal but investment demand may not pick up until the authorities cut the high import duty and also relax the 20:80 rule for imports," Mehul Choksi, chairman of Gitanjali Group, told FE.
According to the WGC, gold jewellery demand dropped an annual 9% in the quarter through March to 145.6 tonnes, while investment demand crashed 54% to 44.7 tonnes. Interestingly, it said gold demand in the UAE shot up by 15.5% in the March quarter to 24.5 tonnes, suggesting that many Indians brought gold there only to bring it back home illegally.
Gold prices lost Rs 300 in Delhi on Friday to hit a ten-month low of Rs 28,250 per ten grams as premiums crashed. Gold premiums were hovering around $25-30 per ounce, compared with $45-50 on Thursday and $110 on Wednesday, jewellers said. Gold premiums hit a record $160 per ounce last year after the government raised an import duty on gold for a third time in a year to 10% and the central bank mandated that at least one-fifth of imported gold be reserved for exports after value addition under a 20:80 rule, both aimed at containing CAD.
"Jewellery demand may rise 10% this year, but investment demand may not rise that much. This is because the expected pick-up in the economy could open up more avenues for investment, including stock markets," said Suvankar Sen, executive director at Senco Gold, the largest jeweller in eastern India.
BullionIndia director Sachin Kothari said: ďThere is a feeling in the market that import duty