As the Indian economy recovers from the slump brought on by the COVID-19 pandemic, India’s gold imports fell to the lowest during 2020.
Apart from the global economic crisis, another reason was the decision that the government had made on July 5, 2019, when the import duty on gold was increased from 10% to 12.5%. The decision shook the local gems and jewelry industry as there had been a prevailing demand of a duty cut to in the sector.
A consumer, today, apart from the 12.5% import duty has to also pay a 3% goods and services tax (GST) on gold value and a 5% GST on making charges which has put the jewelry industry under considerable stress.
This situation puts all the weight on Union Finance Minister Nirmala Sitharaman’s shoulders with only a week left before the Finance Ministry presents the Union Budget 2021.
Although the situation of the gold market may feel tense, here are a few points that present a good argument in favor of the consumer –
- India held a surplus of $15.5 billion at the end of September 2020, and the results from the Ministry showed that the government held an all-time high surplus of $19.2 billion which indicates that there is no true requirement for a hike on gold imports since the current accounts have sufficient surplus volume.
- Secondly, the nation witnessed a huge flow into the arena of gold ETFs, ever since the government increased the gold import duty to 12.5 percent. Gold ETFs (also called ‘paper gold’) have become a popular choice because of their advantages over physical gold such as liquidity, transparency in pricing, tax efficiency, affordability, assurance of purity and safety. Conforming with this phenomenon, the data showed that the total interest in gold ETFs rose from 4.23 lakh in December 2019 to 8.87 lakh in December 2020.
- Since last year, the government has issued nearly 58.9 tonnes valued at Rs 29.037 crore of gold through the sale of sovereign gold bonds. An increase in import duty in a loss of nearly Rs 725 crore to the exchequer, further making it a bad choice for the government.
- The rupee has recently regained its sustainably to a level of Rs 73.02 against the dollar, after its previous devaluation during the beginning of the pandemic.
High rate of inflows and a drop in overall imports helped the Rupee, along with a considerable decrease in domestic demand for imports. Any increase in the duty is likely to put additional pressure on imports, which will result in further appreciation in the rupee against the dollar.