The gems and jewellery industry has been handed a mixed bag of announcements by the finance minister in this year’s Union Budget. Four critical policy announcements were made to stimulate the gold ecosystem, and two hopeful announcements went unmentioned.
First, a comprehensive policy to develop gold as an asset class was well-received by the industry. India, despite being one of the largest consumers of gold in the world, plays an insignificant role in the global bullion market and in the process of determining the price of gold. This has largely been the result of lack of transparency in the domestic market. A national gold policy is expected to bring about a broad action plan that can efficiently connect all the stakeholders of the gold value chain, and help in creating a smooth, efficient and a robust gold ecosystem in the country.
Second, the intention to establish a bullion spot exchange in India is laudable. Despite the gargantuan size of the gems and jewellery sector in the country, it remains largely fragmented and unorganised in terms of both establishment and processes. For example, inconsistencies in both price and purity of gold across the country have almost become the norm. On any given day, the price of gold in major metros and even in tier-1 cities can vary anywhere between Rs 500 and Rs 2,000 depending upon the base price followed by the jeweller. There is no price discovery mechanism for gold.
A survey of 501 jewellers from 10 states undertaken by Pahle India Foundation found that 43% of jewellers derive their base price from the rate quoted by the respective state jewellery associations. The remaining follow price issued by the India Bullion and Jewellers Association (IBJA), MCX, MMTC and other star trading houses or even banks. Setting up of a bullion spot exchange in India will allow for all stakeholders to trade on the same platform, thereby facilitating a transparent price discovery mechanism. Further, creation of a bullion spot exchange will lead to creation of an efficient vaulting system in the country, which, in turn, will help in creating and maintaining standards in quality—a gap in the value chain that needs bridging to integrate the above ground stock with the financial system in India.
Third, the decision to re-examine the Gold Monetisation Scheme (GMS) is sensible, considering its poor success. GMS, in its current form, has garnered little interest form retail consumers on account of cumbersome processes. A revamped GMS must take into account the growing popularity of digital gold. Its success cannot be the sole responsibility of banks; the revamped version must move beyond banks and involve other players in the value chain—jewellers to begin with.
Fourth, the reduction of corporate tax to 25% for businesses with a turnover up to Rs 250 crore is bound to put a smile on majority of stakeholders. A large number of jewellers are expected to be benefited from this move—many fall under this bracket. This decision will prove to be a morale boost to the industry as a whole.
This being said, the Budget has done little to ease doing business for this sector. The constant and justified ask to reduce import duty on gold and gold doré has gone unheeded. Currently, import duty on gold stands at 10% and that on doré is 9.35%. To make matters worse, the government decided to add a social welfare surcharge of 3% on the aggregate duties of customs, which will drive prices up. High duties have instigated a large-scale influx of smuggled gold. To make smuggling unattractive, the import duty must be reduced. Likewise, the import duty on gold doré must also be reduced to make it more competitive than import of finished gold. Import of gold doré is in line with the Make-in-India initiative and will also offer Indian refineries a chance for significant value addition.
Hedging price risks will remain expensive. Traders and hedgers on the commodity markets will continue to pay commodities transaction tax. The infamous CTT has forced many market participants to move to either grey markets or exchanges abroad to hedge their price risk. CTT has increased costs of transactions manifold. Commodity exchanges reported business volumes falling by almost a fourth since the time of the imposition of CTT and rather proved to be revenue negative for the exchequer. The mere removal of CTT would have brought traders back to the exchange, allowing them to hedge their risks in a price-efficient manner.
This government has executed many firsts when it comes to gold. Most importantly, it has desisted from treating gold as a “dead asset” and recognised its importance for trade, for Make-in-India, and for the Indian consumer. The creation of gold policy may well be that one game-changing reform. For even though the government’s focus on gold is clear, it has not always been reflected across ministries. Past Economic Surveys continued to call it a dead asset. Customs duties and taxation policies have increased costs of business and export policies have not been reviewed to help jewellers create a brand for Indian jewellery. A gold policy is a must, but most importantly a gold policy must have the statutory wherewithal to supersede all extant policies and become the one policy that rules all.
By Nirupama Soundararajan and Arindam Goswami. Soundararajan is head of Research, Goswami is associate fellow, Pahle India Foundation. Views are personal