Strong case for easing gold import rules

Say imports are unlikely to shoot up as investment, export demand has gone down

The trend in gold imports suggest it is unlikely to be higher under current rules and there is strong case to relax the latter, as it has no more seen as a pressure point on the current account deficit.

Import in the June quarter, says the World Gold Council (WGC), fell 37.4 per cent from the same period last year, to 224 tonnes. The June quarter last year was admittedly an aberration, with a huge inflow ahead of festivals. However, analysts expect with the current high import duty of 10 per cent and the Reserve Bank of India’s 80:20 rule, import is likely to be what it was last year.

In 2013-14, imports by the WGC estimate were 684 tonnes, of which around 300 tonnes came in April and May when there were no import restrictions and the duty was eight per cent. This June quarter’s monthly average import was 75 tonnes, pushed up by an unusually high import of around 100 tonnes in June. This was due to widespread expectation of a cut in duty in the Union Budget, presented in early July. Also, some import took place ahead of an international jewellery fair in July. Going forward, “in the current framework and reflected by trends in investment demand, monthly import could be 50 tonnes on an average for the next couple of quarters,” said a veteran bullion analyst.

  WGC has also said the monsoon’s progress will determine the rural demand trend. The monsoon is estimated to be substantially deficit this season. Haresh Soni, president of the Gems and Jewellery Trade Federation, said: “Even investment demand for gold has come down and investible funds have been diverted to equities.” WGC data suggest investment demand has come down 67 per cent in the June quarter in India. Against that, jewellery demand has fallen only 18 per cent.

Soni says, “Export demand from Gulf nations and countries like Israel has been affected due to geopolitical tensions there and demand from non-resident Indians have dried in the past few months. Domestic demand has also been lower, as buyers are waiting for a duty cut which  will bring down the gold price in India.”

Sonal Varma, the India economist at Nomura, said: “Gold import is no more a pressure point for the current account. Even if the government relaxes norms, import is unlikely to shoot up to earlier levels.” In the current framework, the import bill for gold will remain flat in FY15, she said, and with liberal import norms, “due to overall lower prices and lower investment demand for gold, the bill will remain under control”.

All these suggest, “there is a strong case to liberalise gold imports and the government should do so without fearing an increase in import flows, as investment demand which used to be a third of total demand, has been drying”.

If the duty is cut and some more room is allowed for inflow of gold, the attraction for smuggling will also come down as the higher hawala premium of 3-3.2 per cent and crash in premium for physical delivery from $100-150 dollar an ounce to just $5 an ounce will keep smuggling under check, believe market players.