Making India the gold trading capital of the world

Posted On Wednesday, Feb 24, 2016

Gold started off the New Year on a solid footing, like it has done for much of the last decade. Yet there is little to rejoice for an Indian gold investor. Not that the Indian investors have not benefitted from rising gold prices but the increase here has been a little lower than what should have been. The Indian gold market is trading at steep discount to its parity rate. Indian gold prices are derived from the international gold prices and converted to local currency using the rupee rate and adding the duties and taxes prevalent to arrive at the Indian gold price or the parity rate. The price quoted in the local markets is running at a steep discount to this derived Indian gold price or parity rate.

An import cut in this budget?
There is a widespread expectation in the market that the import duty will be cut by about 2% in the upcoming budget. And this expectation seems to be getting priced in by the market participants. Last year, market participants were expecting a duty cut in the budget which eventually did not materialize. Even this year it looks unlikely to us that the government would provide markets with a cut in import duty given that the fiscal looks already stretched.

Chart: Indian physical gold market trades at a discount

Source: Bloomberg
As seen in the chart, the black line is the gold spot price which is trading at a discount to the futures price and to the parity rate. The blue colored line is the MCX futures market which is trading at a discount to parity rate shown in purple color, largely reflecting the duty cut expectations.

More reasons for the discount in Indian gold prices
However, the discounts in the physical market have been larger than the duty cut expectations. Lower demand is cited as another reason behind the discount in physical gold prices. We have seen Indian gold demand wane in times of increased volatility or sudden jump in prices. And with the sudden jump in prices, there aren’t many takers at this point in time. However, rather than blaming lower demand, the discounts are more to do with the government policies surrounding the gold markets in India.

It is easy to understand that rising imports are a cause of worry for the government as it increases the pressure on the current account deficit. But, it’s indeed difficult to understand why the export of gold is prohibited.

Not really prohibited, in the true sense - you can export gold, but it requires a minimum value addition of 3%. If we were able to export the gold back out of the country without constraints, the markets might be in equilibrium to the international parity rates and the government would get dollar inflows as well and ease some pressure of the depreciating rupee. But in the current context, it is not so simple as local levies and taxes like the import duty, VAT, etc. act as a hindrance. This is another reason for a distorted gold market and does hamper the development of the market in many ways. The customs duty collected helps reduces the deficit by only a negligible proportion. Hence, the government should focus on implementation of 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.

Making India the gold trading capital of the world
The government is indeed taking steps in the right direction by introducing schemes addressing the gold market like the gold monetization scheme, sovereign gold bond etc. which were indeed the need of the hour. Also, an attempt towards more financial inclusion is seriously undertaken through schemes like Jan Dhan Yojana. However, we think that there has to be significantly greater efforts to solve problems. These schemes and policy rhetoric towards discouraging consumption is addressing the symptoms and not the problems. The sovereign gold bond which many were hopeful to get an overwhelming response to be mopped up entirely in the first tranche itself has made Rs. 1,044 crores over 2 tranches which is miniscule in comparison to India’s physical consumption and its own target to mobilize Rs. 15,000 crores this fiscal.

India has all it takes to become a dominating power house that can control the gold market because of its great consumption power, huge gold stock reserves with individuals, and established exchanges and products that are needed for the development of the gold market already in place. However, instead of being a price driver, we have been categorized as price takers.

The BJP government which was in power in early 2000s took some bold steps and provided its vision for the gold market. The same can be illustrated as follows:

 1)2001-2002:"In order to discourage smuggling I propose to reduce the duty on gold from Rs. 400 per 10 grams to Rs. 250 per 10 grams."- Yashwant Sinha
 2)2003-2004:"As for gold, it is proposed to reduce the customs duty on imported gold to Rs.100 per 10 grams from the present level of Rs. 250 per 10 grams, but only when it is brought in the form of serially numbered bars, or in the form of gold coins, not as ‘tola’ bars, please. It is my hope and expectation that this will become the first step in enabling India to shortly emerge as the gold-trading capital of the world."- Jaswant Singh

Just a simple question: Where has the dream of making India the gold-trading capital of the world disappeared?

In today’s date, customs duty has become a revenue-earner for the country and this dream of making India the gold-trading capital has been sacrificed for the sole purpose of filling the government coffers in a bid to reduce the deficit.

Our appeal
Government policies play a big role in making or breaking the market. Hence, we urge the Finance Minister to stay uninfluenced by the short term gains of the custom duty and look towards the complete development of the gold markets in India.

Further reforms that can be introduced to fulfill the dream of making India the gold-trading capital of the world:

A gradual move towards a free market, which allows imports and exports of gold to be made freely or with minimal restrictions / reporting. While there is a high chance that domestic prices are not at par with international prices due to excessive price fluctuations, this is unlikely to happen in a free market and would thus serve as a stepping stone towards bringing efficiency in the markets.

Get domestic prices on level with international prices so as to bring about an efficient two way transfer of gold. This will help lay down some basic rules in order to find the true price of gold and be able to influence global prices. For this to become successful, all the additional taxes, duties and levies need to be abolished. If the motive is to generate revenues, there are many other ways post the market development. Like the government could apply an annual fee on foreign bullion players trading in Indian markets and raise revenues through the fees charged on them.

An entity like Gold Corporation is the need of the hour to ensure smooth implementation and coordination of the newly launched gold schemes. It would increase the chances of success when the shortcomings can be easily addressed by a focused entity. Not only that, India could further develop its gold market and use its strength to become a hub for gold trading, refining, jewelry manufacturing etc as far as the global gold market is concerned. India has the potential and expertise in gold and also being the largest consumer and holder of gold, this is certainly possible – an entity like Gold Corporation can help in a big way by creating the right policies to help develop the market.

It is important that various forms of gold purchase today become fungible and easily transferable over time. One should be able to deliver their sovereign gold bond and get physical gold like it happens in an ETF or be able to deliver Gold ETFs for exchange for a piece of jewelry. This will ensure all-round development of the gold eco system and help in brining in the much needed trust of people in various gold initiatives and have them look at options other than physical gold.

In conclusion, there seems to be higher probability that the customs duty will be maintained at current elevated levels of 10%. The customs duty collected helps reduces the deficit by only a negligible proportion. Hence our appeal to the government is that, the government should focus on implementation of 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.

Source: Bloomberg

Statutory Details and Risk Factors:
The views expressed here in this article are for general information and reading purpose only. The views expressed here do not constitute any guidelines or recommendation on any course of action to be followed by the reader. The views are based on the publicly available information, internally developed data and other sources believed to be reliable. The views are meant for general reading purpose only and are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the readers. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this document.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.


SIGNUP FOR OUR NEWSLETTERS
Update your knowledge on investments with Quantum Direct...
Read about the Quantum point of view on everything that happens
in the world of finance...

Sign Up NOW!
  • Name

  • Email ID

  • Phone

  • Sign Up For

* I agree to receive various communications (for products or otherwise), updates, alerts, notifications, information, including that on products of Quantum Asset Management Company Pvt Ltd (QAMC), and/or of associates/affiliates of QAMC, which may be sent to me from time to time [even though my Mobile No. may be registered under the National Do Not Call Registry (NDNC)] Please read our complete Privacy Policy.
Contact Us

Toll Free: 1800 209 3863 /1800 22 3863

For International Users: +91-022-2278 3863+91-022-6107 3863

Board Line No: 022 - 6144 7800

Fax: 1800 - 22 - 3864

Email

CustomerCare@QuantumAMC.com

SMSSMS <QUANTUM> to 9243223863

Missed CallGive us a Missed Call on 022 6107 3807

Certified Seal
Business Seals
Privacy Seals
Security Seals

© 2016 Quantum Asset Management Company Private Limited

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.