Budget’s gold import duty cut main door to success of other reforms: WGC India MD

P R Somasundaram, WGC Managing Director, India

The World Gold Council (WGC), the market development organisation of gold producers across the globe, is positive about the proposals in the Union Budget for 2021-22 tabled in Parliament on February 1 by Union Finance Minister Nirmala Sitharaman.

The cut in the import duty on gold “is the main door to success of other policy reforms on gold”, says P R Somasundaram, WGC Managing Director, India.

Somasundaram, who has diverse experience across diverse industries for nearly three decades, says Sitharaman could, perhaps, have given a one-time capital gain exemption for gold. He also said the Union Government could tweak the Gold Monetisation Scheme for better success. It can also be done outside the budget.

Edited excerpts:

How would you sum up your or WGC reaction to the Budget proposals for the Bullion sector?

The rationalisation of import duty on gold to around 10.75 percent from 12.5 percent is a welcome and timely move. Hopefully, this is the first of a series of such cuts to make bullion an asset class that operates mainstream. It is a much-needed incentive for the organised and compliant players in the bullion and gold jewellery market. A rationalised duty structure and simplified processes are fundamental to an organised trading market. Following the appointment of IFSCA (International Financial Services Centres Authority) to regulate the International Bullion Exchange at GIFT City last year, the regulatory clarity in this budget around a domestic bullion exchange will spur infrastructure development and good delivery standards, enabling India to emerge as a major bullion trading hub. Revision of the procedure for disposal of seized gold to expedite the process will further prevent illicit trade. Rural welfare schemes announced by the government to boost consumer sentiment will set the consumption cycles in motion and help the jewellery retailers as well. Overall, the budget should lead to positive outcomes for the industry.

What makes you make this conclusion?

Effective landed tax on bullion (including GST) at the final point of sale was 16.26 percent before the cut. The lack of a coherent policy on an important channel of savings such as gold meant that import control - without a credible mining or recycling supply from domestic sources - was sought to be achieved through higher and higher taxes, which led to unintended consequences and essentially discouraged the compliant. This promoted revenue leakage and constantly diluted efforts to make gold an overt asset class. High taxation, when it is simply not practical to substantially capture the flow of illicit gold from neighbouring countries, is one reason why other important aspects of the gold industry such as standards, infrastructure, world-class manufacturing practices, innovation and global marketing, brand creation, etc. that could have made India a “jeweller to the world” suffered attention. So, a cut in taxation is a fundamentally positive step. It is the main door to the success of other policy reforms on gold.

What else do you think Finance Minister Nirmala Sitharaman could have done to help the bullion sector and jewellers?

As gold prices have gone up by over 32 percent, many small businesses may fall back on household gold savings to recapitalise their business. A one-time capital gain exemption for gold would have been a good incentive for the revival of small businesses. A massive innovation programme for the jewellery industry, underpinned by technology, can leverage cross-industry synergies to give our skill base a breakthrough, thereby enabling India’s gold sector to become an export engine on manufactured jewellery.

Do you think the Government could have come up with policies to give more impetus to the gold monetisation scheme, mainly to tap the precious metals lying in households?

As fundamental reforms follow, easing business sentiment, gold will become a tool of revival for many MSMEs and household fortunes, offering a significant source of capital and liquidity. This presents an opportunity to revive GMS (Gold Monetisation Scheme) in a consumer-friendly manner. But GMS is a policy already announced in 2015. What is required now are a few tweaks for better success in implementation. That need not be a budget announcement anymore.

2020 saw gold demand in India dip to a 25-year-low but Q4 was reported to be better. How different was Q4 for gold compared with the other three quarters?

India’s gold demand dropped by over a third in 2020 settling at 446.4 tonnes, on the back of Covid-induced lockdowns and lifetime high prices. However, the drop was significantly lower when viewed in value terms, 14 percent lower than 2019 as prices were up 34 percent hovering around Rs 50,000/10 grams for most of the past year. Jewellery demand fell 42 percent to 315.9 tonnes and investment demand fell by 11 percent to 130.4 tonnes in 2020, mainly due to pandemic related restrictions. However, in Q4 2020, the festive period and the ensuing wedding season revived hopes and drew in jewellery demand worth 137.3 tonnes — the strongest quarter in the year. Investment demand also showed significant resilience, growing 8 percent to 48.9 tonnes. Predictably, as lockdown eased and normalisation efforts were phased in, imports in Q4 rose 19 percent year-on-year, pointing to the positive impact of pent-up demand. This can be expected to continue into 2021 as further normalcy returns and a steady course of reforms strengthen the industry. This duty cut, though marginal, will give a boost to trade sentiment.

What has been the overall impact of COVID-19 on gold nationally as well as globally?

The COVID-19 pandemic raised uncertainty by compounding existing risks and creating new ones. Gold, naturally, was one of the best-performing assets for investors driven by high risk, low-interest rates and price momentum. However, lifetime high prices in all currencies and lockdowns in key global markets pushed consumer demand to its lowest levels. But 2021 will see economic recovery in many markets, particularly India, support demand, whilst investment demand will be pretty much well supported by the low-interest rates, lofty stock market valuations and heightened uncertainties.

Did gold see such a recovery in rural areas too given a good Rabi and Kharif crops harvest?

A major part of India’s gold demand originates from rural India, underpinned by favourable monsoons and a productive harvest period. The country’s age-old affinity towards gold implies that household savings and disposable incomes are both directed towards gold jewellery. We saw the gold demand recovering in Q4 2020, and yes, the rural economy was a significant factor in this.

How does WGC see gold prices behaving this year? What could be the factors for this?

At World Gold Council, we do not forecast prices. But as I said earlier, many factors we saw in the later part of 2019 and 2020 continue to have force. We believe that the very low level of interest rates worldwide will likely keep stock prices and valuations high, and as such, investors may experience strong market swings and significant pullbacks. Meanwhile, the potential risks resulting from expanding budget deficits, combined with the low-interest rate environment and growing money supply, may result in inflationary pressures. Gold has historically performed well amid equity market pullbacks, as well as during periods of high inflation. We expect that the need for effective hedges and the low-rate environment will keep investment demand for gold well supported, but it may be heavily influenced by the perceptions of risk linked to the speed and robustness of the economic recovery. Therefore, we believe that gold may see a positive, though more subdued, performance in 2021.

How do you see demand for gold this year, particularly in India? What makes you (WGC) feel so?

2021 will continue to see an interplay of many socio-economic and geopolitical factors but underpinning a favourable environment in India for both gold price and demand. The sharp rise in the price of gold has now reset consumer expectations about a new normal. Higher risk of stock prices driven by liquidity, low-interest rates, coupled with the inevitable return of family and social occasions and the experiential value of gold buying will release pent-up demand. This could mimic the strong growth seen in 2010 and thereafter, after one of the sharpest dips in gold demand in 2009, following the uncertainties created by the global financial crisis. Innovative marketing efforts of big players and digital interventions are here to stay and all-around efforts to enhance trust in the jewellery industry to mitigate price impact will shape millennial behaviours positively towards gold. 2021 will likely set a trend of long-term growth in Indian gold demand and the benefits of such growth can be explicitly captured if coordinated policy measures are sustained, making gold a mainstream asset class.

What could be the deterrent factors for buying or investing in gold?

Gold is a proven, long-term strategic investment, with unique dual nature, lower volatility and a widespread regulatory framework for many of its products and uses. Looking back, almost half a century, the price of gold has increased by an average of 14.1 percent p.a in rupee terms since 1973 after Bretton Woods collapsed. Its long-term return has been comparable to Indian stocks and higher than government bonds, also outperforming other major asset classes. Indian gold industry has grown tremendously since the withdrawal of the Gold Control Act in the early 1990s. This growth has brought in better accessibility and availability for consumers with a jewellery store in even the remote corners of the country. It has also altered the in-store jewellery buying experience and touched as many households as banks. But at one level, the industry is perceived as having fallen short of expectations, particularly in building trust and transparency in line with global standards, and in being able to market the centuries-old handcrafting skills underpinning its success to dominate manufacturing and become an export powerhouse. This acts as a deterrent to attracting millennials to buy gold. Another deterrent is the restriction on banks buying and selling gold, so invariably, recycling has to be through refineries and jewellery chains only. The lack of a trusted organised trading system is one more deterrent for investing in gold but with an International Bullion Exchange and a domestic spot exchange in the next few years, this should go.

What should, in your view, be the strategy for gold investors and buyers?

Gold is inversely correlated to most financial assets like equities and bonds which have an annual coupon or dividend yields. Gold provides liquidity with no credit risk, acts as an excellent diversifier and improves the overall portfolio performance. It brings stability and acts as insurance and generates higher risk-adjusted returns especially in times of heightened uncertainty. Retail investors are largely driven to invest in gold as it acts as an effective diversifier that works, which makes them cap allocation within a range. Gold’s performance is intertwined with its unique nature as a consumer good and investment asset. And it is linked to the interaction of four key drivers: Economic expansion, Risk and uncertainty, Opportunity cost and Momentum. We should see higher tactical allocations if the uncertainty and volatility continue. The current crisis is unprecedented, and gold has a critical role in a typical portfolio, depending upon one’s risk appetite, time horizon and return requirements. Given the global and financial uncertainty, low-interest rates and debasing currencies, gold is expected to continue its good bull run in the coming few years. Our extensive analysis has illustrated that a range of 6-17 percent of gold allocation to an Indian-rupee based portfolio would boost risk-adjusted returns and deliver tangible improvements on a sustainable, long-term basis.

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