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Long Term Effects Of Hike In Gold Customs Duty

16 July 2019

The precious metal - Gold – which is the personification of prosperity in the Indian mindset, is ingrained in the cultures of all Indian communities. Be it for weddings, special occasions or investments. The faith that Indian people have in gold is unparalleled as the elderly believe the investment in Gold never fails.

Since this precious yellow metal has such an importance in our lives, it has also been one of the highly smuggled items off the Indian coasts. With the finance minister Nirmala Sitharaman in the Union budget 2019 having hiked the customs duty on this precious metal from 10 percent to 12.5 percent, import in India, the net of trafficking is also likely to expand.

The last increase in the customs duty on gold had been in 2013, when the customs duty had been hiked by four percent. After a period of six years, the hike has been imposed again by 2.5 percent.  

India is the second largest consumer of Gold in the world after China. The highest demand for the yellow metal stems from the jewelry market in the country. Out of the total production of Gold in the world, India imports its 11 percent.

In India, the largest portion of imported gold comes from UAE, followed by Switzerland, US and Hong Kong. However, All India Jewelry Trade Council claims that around 300 tons of gold is brought into India through unofficial channels which results into a huge loss in revenue to the government.

Due to the high price of gold, as a result of high import duty, India is expected to see a rise of 25-50% in the entry of smuggled gold. The volume may increase by 150-180 tons of gold this year.

In the B2B segment, people are preferring to deal in cash rather than cheques, which is again an indication of rise in smuggling. As a result, there will be illegal supply of gold in the market. It will boost up the activities of grey market,” said researcher Lekshmi Rose on the recent gold trends.

Another long-term impact on the market due to the hike in customs duty for gold is that foreigners will stop shopping for Gold from Indian markets due to the heightened prices in retail markets. Increase in import duty in gold will also impede efforts to make gold as an asset class.

It will result in cost of business going up, export competitiveness will come down leading to Indian exporters losing their business in neighbouring countries. Moreover, the raw materials for making the precious metal will become costlier,” Rose said.

While it might take the Indian gold market to revive from this slump in sales, the same can only be witnessed with the onset of the festive and wedding season in India when maximum purchase of gold is done on the ‘auspicious occasions of Dhanteras and Diwali.

In the meanwhile, the expectations are of the gold rates going up further. Gold rates in India at the closing mark on Friday was at Rs. 34,944 per ten grams. After the announcement of budget by Finance Minister, gold price shot up by Rs. 590 to Rs. 34900 per 10 gram and proceeded to close at higher rates over the past week.

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