The Indo-Asean free trade agreement, with its proposal for zero duty on gold imports to India, is expected to change the market dynamics and pricing scenario for the yellow metal in the country considerably. The FTA, to come into effect from 2013, is expected to create new hubs such as Singapore and Bangkok, challenging the current favourites Dubai and Switzerland.
Reportedly, total gold imports in India of two major categories of the metal ? monetary gold (gold bar for RBI) and non-monetary gold ? in 2007-08 was worth $16.7 billion, of which Asean countries contributed to just 0.5% at $88.6 million. However, as pointed out by Religare Commodities president Jayant Manglik, the FTA will lay the ground for Singapore and Bangkok to emerge as a favoured sourcing destination for India. ?Both the countries will have to augment their delivery capacity by then to meet the expected demand,? he adds.
?Gold is not only an asset; it is also a global currency. Thus, withdrawal of taxes and duties will definitely bring down the prices. It will also help us price gold in line with other major global gold trading centres and increase retail margins,? Manglik says. A fact also corroborated by Amar Singh, head, commodities research, Angel Broking. ?The FTA would make it cheaper for India to import gold from these cities owing to zero import duty, which currently stands at 10%.? World Gold Council?s Indian subcontinent MD Ajay Mitra was also earlier quoted as saying that the FTA is expected to widen the variety on offer.
The retail trade margins would improve as the pricing mechanism was on an MRP basis, he had said.
Between April 2008 and February 2009, India?s estimated gold imports were worth $9.1 billion from Switzerland, $2.9 billion from Dubai and $2.1 billion from South Africa. As imports make up the major chunk of the country?s gold (domestic production is a miniscule 2 tonne per annum), experts opine it will impact old hubs in the long run.
?Between Switzerland and Dubai, we currently import about $15 billion worth of gold annually. If this market shifts, the loss to them could be substantial. Also China?s retail demand is fast picking up and rivaling that of India. I am sure both supplier countries will go all out to fill Chinese demand,? Manglik adds.
Nevertheless, some experts are divided over the role the FTA could play in replacing the favoured hubs. Vasant Mehta, chairman, Gems & Jewellery Export Promotion Council, reasons, ?With India, China, Japan, South Korea, Indonesia and Malaysia contributing around 2,000 tonnes to import and fabrication of gold in the world, there is every chance that the hub of gold may shift. But it is too early to say where it will shift, as that depends on a number of factors such as presence of refineries and strong banking support for trading. However, if the shift happens, the dynamics will change and new refineries may come in these countries to cater the demand.?
?Australia is a large producer of gold and if included in this trading bloc, may affect the status of Switzerland. Dubai on other hand may be affected by Hong Kong emerging as a strong contender. However, Dubai, being the gateway to the Gulf Cooperation Council (GCC) Countries and Central Asia, is expected to remain a strong player due to its affinity to the GCC countries in buying plain gold jewellery. Switzerland, with the backing of strong refineries and trading apparatus like the large bullion banks, will be hard to replace,? he adds.
Some are of the opinion that for new hubs to emerge, existing standards have to matched first. ?Since Switzerland and Dubai have been the international markets for the metal, provide purity certificates and a friendly duty structure, it enables a quicker loan procedure,? points out Prithviraj Kothari, RiddiSiddhi Bullion managing director. According to Gnanasekar Thiagarajan, director, Commtrendz Research, ?India still is the largest consumer of gold and routing it through Singapore and Bangkok does not provide any major price advantage worth the trouble for importers. I don?t think the 10% duty reduction will affect the demand side equation much, as the percentage of physical demand (which is price sensitive) has reduced substantially compared to the demand when the 10% duty was imposed. The physical demand for gold in the country has reduced substantially due to the metal?s prices almost tripling within last few years. Moreover, most of the demand comes from the investment side, which is not overly concerned about a marginal rise/fall in duty.?
A sentiment also echoed by Bhargav Vaidya of B N Vaidya and Associates: ?I believe that for locally manufactured articles, since there are no great refineries in this sector we may not see a big change in flow for trading gold just by routing through Singapore. Duty on gold is now at 1.5%. For most of last year it was below 1%, so it was negligible. Consumer always benefit from duty drop but impact on demand is not significant.?