The government’s decision to increase the customs duty on gold from 4% to 6% is expected to result in a slight moderation in investment demand, estimated at roughly 30% of the imports in FY12 of 891 tonnes, for the precious metal. While some part of the investment demand could have been affected by the previous increase in customs duty to 4% from 2%, the reduction in investment demand for gold could be 70-100 tonnes by the end of FY14, experts say.
Following the hike in the import duty from 2% to 4%, imports volumes contracted by around 25% year-on-year in the first three quarters of 2012 and are tipped to fall to 855 tonnes in FY13.
However, gold imports are unlikely to come off meaningfully since consumption demand at around 65% of the total demand, as also investment demand, have already moderated close to their averages. One reason for this is the lack of attractive investment opportunities.
A study by Nomura Securities shows that when import duties rose from 1% in January 2012 to 4% in April 2012, imports dropped by about 30%. However, while import duties remained at the 4% level subsequently, imports rose. Apart from the fact that gold remains the best investment option — according to RBI data between January 2008 and May 2012, it gave cumulative returns of over 270% versus around 80% for the Nifty — imports of the metal are directly correlated to inflationary expectations.
With inflation likely to ease, this puts a natural ceiling to gold imports. Although the government is focused on the sharp increase in gold imports, the actual imports between FY10 and FY13 (estimated) would have risen 6.9% in volume terms while in value terms the increase is estimated at nearly 68%.