Review of decade for India’s gold policies

Recently, the World Gold Council published, India’s Gold Market Reform and growth Report and reviewed the decade, from 2013 to 2023 for the unofficial gold market and government’s policy! Over the years, government policies on gold have had widespread consequences.

Back in 2013 and 2014, for example, import duties and the 80:20 rule pushed up the gold price premium in the local market, created uncertainty and deterred some potential gold buyers. But there is a far more pernicious consequence of high import duties and other such restrictions: they tend to drive parts of the gold supply chain underground.

Between Q3 2013 and Q4 2014, some 335t of gold was smuggled into the country, around a quarter of total demand. And, in the second half of 2019, while official imports fell and the CAD narrowed, unofficial imports surged by 42%.

In the face of huge, smuggled inflows of gold, the efficacy of successive import restrictions has been called into question. There is a further consequence too-the more pervasive India’s unofficial gold market becomes, the more difficult it is for the mainstream market to advance and develop. A reduction in tax rates could therefore confer benefits on two fronts.

Lower duties would almost certainly boost overall demand for gold. And lower tax rates could create more opportunities for the compliant and organised sections of the gold market by squeezing out the unofficial or ‘grey’ market. This could have a meaningful impact on India’s role on the global gold stage.

A direct consequence of high rates of duty, grey trading severely reduces gold’s role in mainstream financial services, limits the appeal of India’s handcrafted jewellery overseas and curtails India’s influence in the gold trading market. It should also be noted that gold imports have accounted for just 7% of total imports over the past eight years. Over the same period, electronics imports accounted for 11% of total imports, while crude oil made up 24% of the total. The CAD has also fallen, averaging Rs 2,112bn over the last seven years.

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