Government measures curbing gold import and black money

Experts believe all measures put together will have desired impact on demand for physical gold. Black money will also find it difficult to move to gold

Governance measures taken by the finance ministry along with schemes to mobilise idle gold and sovereign bonds seems to be working. Experts believe all the measures put together will have the desired impact on demand for physical gold. Unproductive demand can be curbed and black money will find it difficult to move to gold.

While the 43 day jewellers strike across the nation has not impacted government decision to impose excise duty on gold and earlier reducing the limit for providing PAN number put together is expected to curb smuggling of gold and using unaccounted money to buy gold jewellery and sovereign gold bonds. These measures are also expected to impact investment related to physical demand for gold. 

As far as the new gold monetisation scheme goes, while the real estimate for how much gold has been mobilised is not clear yet, eight temples have so far deposited gold under the new gold monetisation scheme (GMS). In February end, the government said in its economic survey that over three tonne has been mobilised under GMS. Last week, the finance ministry said in the Parliament that over 2 tonnes have been mobilised. Sources believe, including the deposits from eight temples, and other takers who have opted for the scheme, total gold mobilised under the scheme is estimated to be a little over 5 tonnes. This gold eventually will be lent to jewellers for jewellery making, which will replace imports.

Bonds and GMS were announced last November and in six months so far bonds amounting to over 5 tonnes have been sold. Bonds provide returns more that the actual returns that physical gold provides due to interest paid on it and it replaces demand for physical gold. 

Contrary to expectations, the government has not announced a fourth tranche of issue, despite the occasion of Akshaya Tritiya because at present the Reserve Bank which manages the issue is in the process of issuing bonds or getting them dematerialised. Simultaneously, the government is also preparing a mechanism for listing of bonds aimed at providing liquidity which was promised when the bonds were announced. 

Sanjeeb Agrawal, CEO, Gitanjali Export Corporation, said: "Gold ETFs took five years to succeed. Going by that standard, in the next two years, the response to bonds could be 35-40 tonnes and could reach 100 tonnes in five years. However, for this several things are required."

He suggested the bond issue should be kept open on tap till an internally decided limit is achieved. Even the price can be more dynamic, by taking the previous day’s price as base, he said.

If in two years, 40 tonnes demand can be curbed by selling bonds and making GMS, some more practical from the depositors point of view, Agarwal said it will certainly curb imports without actually impacting demand.

Other measures include imposing excise duty on jewellery and making it mandatory to provide PAN number for buying jewellery above Rs 2 lakh. Both have made dealing in unaccounted gold difficult. However, both are implemented at the consumers end and applied for gold jewellery and hence it has its own impact.

Smuggling has been impacted in recent months due to higher prices along with steep discount. 

Sudheesh Nambiath, lead analyst — precious metals demand, GFMS Thomson Reuters, South Asia & UAE, said: "These measures (PAN and excise) are primarily targeted to streamline the jewellery industry, bring more transparency in the industry and rid itself from the tag of it being a safe haven for black money. However, recent measures are restricted to the jewellery industry and not bullion, which ironically has been the traditional way to store wealth. Thus, the unofficial gold imports will thrive albeit at far lower volumes as it will be primarily for hoarding wealth and may not move into jewellery trade. Eventually an environment is created that separates wheat from chaff, which in the longer run can make the parallel economy difficult to sustain."