Gold In Dire Need Of Bold Reforms

SANJIV AROLE, an independent gold analyst formerly with GFMS, shares his concerns on the pressing need for policy reforms in the gold sector.

Ever since the Current Account Deficit (CAD) crisis 7-8 years ago caused the then Finance Minister to raise Customs duty on imported gold from 1% to 10% in a short span of time, the gold trade is confounded with unresponsive governments. All its arguments, pleas, requests, reasoning, etc., to lower the  import duty on gold seems to fall on deaf ears of successive FMs and even governments.

In fact, instead of lowering the import duty on gold to below 10%, the Customs duty now stands at 12.5% plus an additional 3% on GST. The trade has made several representations on a host of issues, including the high incidence of taxes on precious metals (gold, in particular) in the wake of reforms initiated by the Government. Even the export target of $75 billion from the gems and jewellery trade and the attempt to make India the global gold trading hub appears not to be in sync with tariffs on gold and other precious metals.

The Government has ambitious plans to make India an international hub for gold at Gujarat International Finance Tec (GIFT City) in Ahmedabad. An international bullion exchange and a bullion bank, too, are in the pipeline. However, before dreaming of a glorious future there is an urgent need to set the house in order. It is imperative to look into the following matters listed below:

Lower Gold Import Duty

During the days of the obnoxious Gold Control Act (1962-1990) almost all of India’s demand for gold was met by smuggled gold. However, after the Gold Control Act was abolished by then Finance Minister Madhu Dandavate in 1990, the Indian gold imports were permitted first under the Special Import License (SIL) and then under Open General License (OGL). But, since import duties were still on the higher side there was still some smuggled gold entering India. It was only after import duty on gold was made at Rs.100 per 10 gms for pre-numbered gold bars of metric weight did gold smuggling disappear almost overnight and the tola bar production, too, ceased. Hawala rate became at par with the official rate of the rupee and caused a severe dent to the parallel or black economy.

However, since the import duty on gold has been raised first to 10% over time and now to 12.5%, smuggled gold has reared its head again, hawala rates, too, have shot up. As a result, 100-200 tonnes of gold were smuggled annually since the last 7-8 years. It would seem that the remedy to rectify the CAD crisis has now given way to a medicine worse than the cure itself. Not only has gold smuggling increased it has given a boost to the parallel economy and driven it underground. Moreover, it facilitates barter of gold to pay for arms and drugs. A far more dangerous portend than negative ratings by international agencies. It has also made gold far more expensive for poor investors in rural India to park their savings (they have far less savings options as compared to the urban population). Thus, depriving them of their only international savings vehicle. It is imperative that import duty on precious metals is reduced to rational levels.

Gold Monetisation Scheme & Sovereign Gold Bonds

The authorities seem bereft of ideas when it comes to both the Gold Monetisation Scheme (GMS) and the Sovereign Gold Bonds (SGB), if one looks at their performances, even after five years. The GMS has netted a dismal 20 tonnes, while the SGB a slightly better 55 tonnes (not backed by gold though, and primarily due to the pandemic and the ultra high gold price). Mere tinkering will simply not work. The interest paid on both the schemes should be exempt from Income Tax without any limits. There is a need for market makers for easy liquidity of the SGB and a need to identify various tranches of the SGB to facilitate the selling of the bonds on the exchange. At present, though the entry is easy, the exit is very difficult and impacts liquidity.

The GMS needs an interface between the depositors of GMS and the banks and hallmarking centres (refiners). At present, these players have no incentive to promote the GMS.

The jeweller is best placed to act as an aggregator as he not only knows the psyche of the customers but being in a fiduciary capacity while selling jewellery, etc. could be able to convince the customer to park his gold in the GMS. However, he should be incentivised to promote the scheme, and may be offered a portion of the gold he gets deposited into GMS at a discounted price as an incentive or gold at lower import duty. That could make GMS far more attractive as the jeweller would have a stake in making the scheme a success. Moreover, borrowing and lending of gold should be permitted for gold collected from the scheme. Even Gold ETFs that have just reached 30 tonnes as of now require a lowering of costs to the buyer. Unlike the Western world, money flowing into ETFs is meager and there is a need to target those who are comfortable with paper money. Stock market players could be targeted for Gold ETFs.

Duty Drawback on Jewellery Exports

Duty drawback on export of jewellery is at 75%. There is a need to look into the matter and the trade wants a passbook system for exports and imports. The Tax Collected at Source (TCS) is hurting the gold trade as it blocks the working capital of the trade as the rate of TCS is higher than the margins earned by the trade. This is something similar to what the trade faces with the GST. Working capital is blocked and makes them uncompetitive.

Bullion Exchange & Other Reforms

A slew of reforms await the gold industry in the form of world-class jewellery parks, opening of the gold mining sector, bullion bank as well as the much anticipated International Bullion Exchange. All of the above requires active participation of trade bodies and the major players. FDI in gold mining could be facilitated with the help of trade members who could help identify potential investors. The International Bullion Exchange would require both international buyers and sellers. It is essential that domestic players with certain norms are active on the exchange with a level playing field. Allowing export of gold bullion, too, is a priority to facilitate two-way trade.  

The ambitious export target of $75 billion by the gems & jewellery sector appears to have been endorsed by the concerned government ministry. However, a thumb rule is that for an export market to grow there needs to be a flourishing and, more importantly, a competitive domestic market. With diamond exports having already reached a plateau, the focus needs to be on gold and silver exports (jewellery and bars and coins). Herein, the high incidence of Customs duty makes the local jewellers uncompetitive and with a false sense of complacency as there is no competition from cheaper imported jewellery pieces.

The International Bullion Exchange, too, cannot function in isolation and without domestic participation. The diamond industry flourished in a different era and then too there were leakages of diamonds into the local markets. However, it was only after the emergence of India as a diamond consumption centre (after permission to import diamonds for local consumption was permitted) did the export of diamonds show an exponential jump to near $40 billion at one point of time.

There is an urgent need to lower import duty on gold to around 6% in a graded manner (if not lower) to rationalise the duty structure to be in tune and sync with global markets. The export numbers should not be a prey to round-tripping of goods (gold, silver, platinum or diamonds); it should be based on robust two-way transparent trade. Only then could India become a regional hub for global gold trade. Recently, the LBMA chief supported Indian efforts to become a gold hub.

The Covid-19 pandemic sharply brought into focus the need for gold in one’s portfolio. The double whammy of very high gold prices coupled with the pandemic and worsening global economy saw a deluge of gold delivery into the US from across the globe in the early months of the pandemic-induced lockdown. Globally as well as locally, there was a surge in demand for Gold ETFs. However, gold is plagued by a bias against it in the global and more particularly in the Indian financial markets. It is often termed as a barbaric relic with no place in today’s monetary system.

There is a growing belief that gold is in its third bull market. The first bull market was from 1971-1980 (gold zoomed by over 2000%) and the second one was from 1999-2011 (gold up by over 750%). The current bull market began in 2015 when gold bottomed out at $1,050 per ounce. Since then the yellow metal is up significantly. However, its rise is hardly anything when compared to the earlier bull runs. Will India, in particular, partake in the current bull-run with its immense potential or fall prey to oft-repeated criticism of gold that it gives no yield? It is true that gold has no yield, but it is money and money does not offer a yield. If you want yield you have to take a risk, then put it in a bank, stocks, real estate, etc. and get some yield. You have to put it in an asset class. Warren Buffet, too, had the same opinion, but even he has invested in gold stocks. 


The opinions and points of view expressed in the article are those of the author and do not necessarily reflect the opinions and views of the GJEPC or its members.

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