This is a big price differential in gold between global and Indian prices, which makes it difficult to channelise the hoard of India’s gold savings into circulation.
In the Indian gold market, high customs duty only distorts markets further as the current differential between the Indian gold prices and international gold price has widened to 15.5 per cent in total. The way the math works is 12.5 per cent customs duty plus 3 per cent GST.
This is a significant differential and augurs well for illicit gold imports, apart from further distorting the gold market significantly. We have seen that the Indian physical gold markets trade at a discount almost persistently and reasons cited by the experts are lower demand and illicit imports at the root causes. Such interventionist policy-making ensures that India will never be at the centre of the global gold markets despite being the largest consumer, and will continue to remain a price taker. Such distortions make it difficult to channelise the hoard of India’s gold savings into circulation and thereby integrate the gold market with other financial markets. For instance, the recent introduction of tax collected at source (TCS) also leads to price distortions in the gold market.
Historically, while the authorities have pursued policies to de-emphasise gold and to suppress demand for gold, the balance sheet of households showed more gold on the asset side.
The Committee on Capital Account Convertibility (CCAC) put forward some precise and action-oriented recommendations on the liberalisation of the gold market. The CCAC stressed that it was essential to liberalise the policy on gold while simultaneously taking steps to develop a transparent and well-regulated market in gold, which would be integrated with other financial markets (China is moving in this direction). In its view, the main ingredients of the change in the policy on gold should be:
Removal of restrictions on import and exports of gold,
Development of gold-related financial instruments,
Development of markets for physical and financial gold,
Encouragement of banks and non-banks to participate in the gold market.
The CCAC suggested mobilisation of private sector gold for external adjustment and removal of external constraints. Removing tariffs and freeing the market are the prerequisites for this development.
What the Indian gold markets need for it to influence global gold markets:
A gradual move towards a free market, which allows imports and exports of gold to be made freely or with minimal restrictions. Get domestic prices on level with international prices so as to bring about an efficient two-way transfer of the commodity or currency. This will help lay down some basic rules in order to find the true price of that commodity or currency. For this to become successful, additional taxes, duties and levies need to be abolished.
There is a huge amount of accumulated wealth of gold in India. The government should try to use these savings for the development of the nation by mobilising and channelising the same to productive uses. Price distortions will only push further any real chances of bringing gold in circulation.
If the motive is to generate revenues, there are many other ways that can be adopted once the market develops. The government could apply an annual fee on foreign bullion players trading in Indian markets and raise revenues through the fees charged. The customs duty collected helps reduce the deficit by a negligible proportion. Hence, the government should focus on implementing reforms and look at the bigger picture to develop the gold market as it truly possesses the potential of becoming the gold trading capital of the world.
We agree that these reforms cannot be achieved overnight. However, these are essential steps towards strengthening our gold market which would enable us to further cement our position as world leaders in the global gold market.
The author is MD and CEO, Quantum AMC