Govt. hikes import duty for gold and silver

On Tuesday, Jan 17, 2012, the Indian government raised the import duty on gold and silver, stating that the commodity prices have risen to higher levels in the last one year, and the rates were not revived according to the market prices. Gold import in India has increased significantly in the last few years which have also led to an increase in the current account deficit of the country. Therefore, this move by the government is also to curb imports and strengthen the trade deficit. Gold is the third-largest imported commodity after crude oil and capital goods in the country.

The increase in import duty will benefit the government in terms of extra earnings of around Rs 500-600 cr which can help them to reduce the widening gap of trade deficit. Further, this will also help the rupee to strengthen as lower import will lead to lower outgo of the dollar, thereby increasing the liquidity of the dollar in India. India is world’s largest consumer of gold and imports 85%-90% of the gold with the rest coming from recycled gold in India. The consumption in 2010-11 stood at 905.18 tonnes. However, due to higher prices, imports in the first six months of 2011-12 stood at 553 tonnes and in the Sep 2011quarter, it stood at 200 tonnes.
 
We believe that the increase in duty will impact the demand from the importer side for traders and to some extent the gold consumers in India who will look to buy when the prices stabilise in the short term. The local jewellery and other physical gold assets will get more expensive at a time when it is already trading at its near all-time high of Rs 28,000 per 10 grams. The import duty on gold has been changed to 2% from a flat Rs 300 on 10 grams earlier while for silver the import duty has been raised to 6% from a flat Rs 1,500 on 1 kg.

The hike in the duty will lead the trader to pay almost double the duty as compared to the earlier rates. Assuming the price of gold at Rs 28,000, the import duty will be Rs 560 against the old value of Rs 300. And for silver, assuming a price of Rs 53,000, the 6% duty will lead to an outgo of Rs 3,180 versus a flat amount of Rs 1,500. Also, excise duty on gold has been fixed at 1.5% of the value against the earlier rate of Rs 200 per 10 grams. Silver will attract excise of 4% compared to Rs 1,000 per kg earlier.

Despite a continued hike in the gold prices in the last one year, the import of gold in India has remained high and this was because of inherent passion of Indian consumers for gold. Therefore we believe that a minor hike in gold prices will not have much impact on the demand from the consumer from a long-term view. However, with the change in hike of the percentage, importers will now pay higher whenever the price of the metal goes up.