By Colin Shah
For December 2022, the total gross export of Gold Jewellery (Plain & Studded) a decline of 4.55% to Rs 4,635.64 crores (declined 12.62% in dollar terms to $562.48 million) as compared to Rs 4,856.47 crores ($643.74 million) for the same period last year. For the month of December 2022, the total gross export of all kinds of Studded Gold jewellery declined 21.95% to Rs 2,265.90 crores (declined 28.51% in dollar terms to $275.03 million) as compared to Rs 2,903.01crores ($384.69 million) in December 2021. The government hiked the import duty on gold from 7.5% to 12.5% in July 2022, adding the 2.5% agricultural infra cess makes the overall duty to 15%. This has primarily led to a rise in the key input cost for the Indian jewelry industry.
A rise in the cost of imported gold has reduced the cost competitiveness of the industry. The Finance Minister in her Union Budget 2023-24 should look at bringing down the duty to 9% to provide relief to the industry. The jewelry industry needs special focus from the government as it is a huge exporter, creates huge employment opportunities, and is highly regulated.
Let’s understand the impact of the rise in import duty,
• A higher import duty has increased the incentive for unofficial imports and as a result, there is a serious jump in cases of smuggling.
• The move has also led to instances of duty evasion by other means such as imports of platinum alloys to take benefit of lower import duty compared to gold. Around 25 tonnes of such imports were recorded during September and October 2022.
• The steep hike in import duty on gold has distorted the price discovery in the Indian market. Gold is trading at a persistent discount over the last few months. The discount averaged $30 in December 2022, and since July 2022, the average was around $15.
• The discount in prices is only benefitting those dealing in cash and unorganized trade. While it is adversely impacting the organized players as they cannot compete with the unofficial market due to the wide price differential.
• Even with the duty differential that gold refineries enjoy, they cannot compete with the prices in the unofficial market and this has made many Indian refineries unviable in the current dynamics.
The government too on its side has to walk a tightrope – as a cut in the import duty on gold will lead to a rise in imports thereby increasing the current account deficit. The scenario also has a bearing on the domestic currency. But, even as the government tries to control the high import situation via the official channels, the imports are still happening via illicit routes. For a gold centric market like India, the demand does not come off because of higher duties.
We have two of the government’s actions from the past that can help address the issue at hand – the Gold monetization scheme, Gold Sovereign Bonds.
Gold monetization scheme: Introduced in 2015, the scheme requires people to deposit their gold with government-affiliated banks. On depositing gold or gold ornaments the depositors get 0.5-2.5% interest on the value of gold plus there is no hassle to store gold. The scheme had a drawback in that the gold ornaments deposited will be melted, and at the end of tenure, investors get the value of the prevailing gold rate. Many Indians buy gold ornaments and store them, and pass them on to the next generation. It has a sentiment/emotional value. This scheme is apt for investors buying physical gold in the form of gold bars and coins. Instead of managing the cumbersome part of the story of the gold, it can be handed over to the banks/government, earning risk-free interest and the appreciation value of the yellow metal. If the scheme could be tweaked so that gold doesn’t have to be melted the GMS could become a bumper success.
Sovereign Gold Bond: India has a unique product known as a Sovereign Gold Bond or SGB where the government offers a Gold Bond instead of physical gold, also known as paper gold by many. The bond pays a 2.5% coupon payable bi-annually. At the end of the tenure, the investor can redeem the bond at the prevailing gold rate. This is a win-win situation for all stakeholders. The government can help wean off Indians’ habits of perpetually buying physical gold. What’s more, the gains and the interest earned are tax-exempt if the bond is held till maturity. This move of the government has found a strong response as the government has issued SGBs worth over Rs 30,000 cr since its inception in 2015. Let’s take a look at the returns of the SGB vs Nifty 50 index. Equities are much more volatile than gold, plus there is an LTCG tax payable after a threshold. The only downside is that these bonds have a lock-in and the trades are often illiquid.
The chart clearly shows the returns garnered by SGB vs Nifty index and it’s clear the risk-free bonds with sovereign backing have scored better than equities. The government needs to incentivise investment in SGBs, depositing gold in GDS to reduce the demand for physical gold for investment. The import of yellow metal should only be done for use in jewellery purposes and little to negligible for pure investment and storage purposes. This could potentially reduce imports by 25%.
The government needs to protect the Indian jewellery industry from losing its sheen without impacting the other economic components. The industry is closely watching the FM’s budget to be unveiled in a few weeks from now.
(Colin Shah, MD, Kama Jewelry. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)