The government’s decision yesterday to increase the import duty on gold by another two per cent will only result in enriching those who already hold gold, as higher duty will result in price rise. Fresh imports will be costlier to that extent, and existing gold will also fetch higher prices.
It is estimated that Indian households have 25,000 tonnes of gold with them, worth Rs 76 lakh crore or $1.4 trillion. While this dormant wealth will become more valuable, it is equally true that the government’s efforts to discourage gold imports just by raising duty or allowing Exchange Traded Funds (ETFs) to put the gold held by them as deposit with banks will not serve the purpose.
The reasons:
As on September 30, 2012, the total value of gold with these funds was around Rs 12,000 crore. This means they held around 55-60 tonnes of gold as they were buying gold when prices were lower. Even if they were to put all the gold with banks under the deposit scheme, and banks could lend all this gold, the demand for gold import would fall only by that much. India imported 969 tonnes of gold in calendar 2011 and in first nine months of 2012, imports were 604 tonnes. In the July-September quarter, imports are expected to be around 240 tonnes and with all gold holdings of the ETFs being lent to jewellers, next year’s import will be lower only by $3 billion or just seven per cent.
In any case, ETFs will not deposit all the gold, as things are not clear from banks side -- banks themselves have several issues to resolve before they start handling such a high stock of gold. In fact, ETFs will keep some stock with them to meet any unforeseen profit-taking whenever the opportunity arises. Sebi is preparing guidelines for this and will be certainly thinking about how much gold can be kept with banks as deposit and may also be suggest its tenure.
Gold imports can fall only if investors feel that enough safe assets giving good returns are available in India where they can park their incremental investments, or if existing investors start booking profits. Other assets classes such as equities are still not seen as safe from volatility and market risk.
India's demand for imported gold will be moderated only if, for whatsoever reason, the metal loses its lustre in the global market and global investors who have not booked profits during the pase five years start selling off in a big way. However, that too will happen cautiously as given Indians' instrinsic love for gold, and no sharp or consistent fall in demand can be expected because demand will keep coming in at lower levels.
Recycled gold becomes a source of supply when consumers come to the market to sell their old jewellery. If this happens in a big way in the coming months, and if prices stabilize and remain high, then some gold demand may get moderated.
The table shows how recycled gold supply has increased in last few quarters.
| Supply of recycled gold in India | |
| Q4-2010 | 25 |
| Q1 2011 | 10 |
| Q2 2011 | 10 |
| Q3 2011 | 15 |
| Q4 2011 | 23 |
| Q1 2012 | 25 |
| Q2 2012 | 30 |
| Q3 2012 | 34 |
| Source: WGC; Figures in tonnes | |