Demonetisation brings short-term headwinds for gold demand in India

Despite demonetisation-led short-term headwinds, India’s gold demand is estimated to average 850-950 tonnes every year till 2020 due to the government’s initiative to curb black money and increase focus on transparency, World Gold Council (WGC) said in its latest report released on Tuesday.

India has been witnessing its gold demand in this range for the past several years. However, the demand for the metal is estimated to have declined by a fourth to 650-750 tonnes in 2016 due to various measures adopted by the government to discourage consumers from buying it as an asset class.

Interestingly, a fifth of the gold demand last year is estimated to have been met through smuggling, which became prominent since 2013 when the government began raising import duty on gold in phases, to 10 per cent, apart from taking measures to reduce gold import into India. According to WGC report estimates, gold smuggling stood at 120-135 tonnes, constituting around 20 per cent of India’s annual gold demand in 2016.

WGC managing director, Somasundaram P R, however, believes that India’s gold smuggling has declined sharply since the government announced demonetisation of high-value currency notes on November 8, constituting 86 per cent of India’s currency in circulation.

“Owing to the liquidity crisis (arising out of demonetisation), India Budget News gold smuggling was impacted. The grey economy which was reliant wholly on cash would be impacted,” Somasundaram said.

However, the depth of contraction will depend on how much of the demonetised currency worth Rs 15.44 lakh crore is replaced. With the introduction of goods and services tax (GST), mandatory hallmarking and a massive push by organised jewellers to promote non-cash payments, business across the gold trade will become more transparent.

This will hit the grey market and deter those who seek anonymity to avoid taxes. Consumers, meanwhile, will reap the benefits of transparency in prices and purity.

Thus, although gold demand faces some short-term headwinds, longer-term prospects are encouraging,” said Somasundaram.

WGC estimated the total gold holding in Indian households to range between 23,000 tonnes and 24,000 tonnes with the holdings of temples and other religious institutions falling within the 2000-4000 tonnes range accumulatively, which tantamounts to around half of the gold holdings of the United States. Gold holdings of these religious bodies is also more than most countries’ accumulative bullion holdings.

“The government’s primary objective is to bring transparency into the trade. Hence, such a high duty after demonetisation encourages unofficial channels of import of gold into India. The current duty of around 13 per cent (10 per cent customs, 1.5 per cent of value added taxes or VAT and 1 per cent of excise) is, therefore, a disincentive to the official trade. Hence, along with the Union Budget, the Goods and Services Tax (GST), overall levy on gold should be significantly lower,” said Somasundaram.

Demonetisation brings short-term headwinds for gold demand in India

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