Indian govt could still cut gold import duty this year – WGC

Otmane El Rhazi from The Bullion Desk.

The Indian government may yet cut the 10-percent import duty on gold this year despite choosing not to do so in this year’s budget as many market observers had expected, Somasundaram PR, the World Gold Council’s managing director in India, said.

“They have not cut it because they said ‘let us evolve, let us pass a few bills’ but 10 percent is still a lot of money,” he told FastMarkets. “When push comes to shove, it will be reduced but they will wait for certain other things but, as I see it, things are moving in the right direction.”

The Indian government confounded widespread speculation for drop of 2-4 percentage points in the duty, which has stood at 10 percent since August 2013 – it was raised three times that year from the initial four percent.

The finance ministry opted instead for further measures to monetise the metal through the introduction of a gold-centric bond and an overhaul to its gold deposit scheme.

These are the latest state-led initiatives to tap into the vast wealth currently stored by Indian families. Should they prove successful, they could ease over the long term the need to import gold – though previous attempts have foundered, failing to find support among grassroots consumers.

The new bonds will carry a fixed interest rate and will be redeemable in cash pegged to the face value of gold at the time of maturity. As well as giving investors long exposure to gold, they will also earn a fixed interest rate – gold typically has no direct yield.

But Somasundaram doubted whether the schemes, particularly the gold-centric bonds, will find much traction with the Indian public.

“Say I have to pay 30,000 rupees today for 10 grams… without the duty, it would be 26,000 or 28,000 rupees,” he said. “So are you going to charge me 30,000 rupees for a bond and then lower the import duty in six months’ time?”

“I have said it personally before that none of the schemes will work because 10 percent [in import duties] is still a huge incentive for smuggling. As long as smuggling prevails, none of these schemes will work,” he added.

Smuggling has been an issue in the Indian gold market for some time, particularly prior to the removal of the 80:20 rule in November, which made it mandatory to export 20 percent of all imported metal.

Some 175 tonnes of gold entered India illegally last year, Somasundaram believes. India’s total demand in 2014 was 842.7 tonnes, a drop of 13.5 percent on the previous year’s total of 974 tonnes, according to WGC figures.

(Editing by Mark Shaw)

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