Why India's gold import bill is set to hit 5-year high

Good monsoon, farm loan waiver -- the two key reasons behind more customers in jewellery shops.

India’s gold imports in terms of quantity in the first half of 2017 crossed the entire imports of 2016.

According to data compiled by GFMS Thomson Reuters, India imported 510 tonnes of gold in 2016, while the imports in the January-June 2017 period were 521 tonnes.

In 2016, the imports bill for gold in value terms according to the ministry of commerce was $23 billion and till June this year, industry estimates stood at $22.2 billion.

Going by industry estimates, gold imports are likely to cross 900 tonnes against the average imports of 709 tonnes in the past five years, and the imports bill is expected to cross $40 billion in 2017.

If the estimates come true this would be the highest imports in value terms since 2012.

Industry sources estimate that lower gold prices, reduced liquidity after demonetisation, lower than a feared goods and services tax (GST) rate, at 3 per cent, farm loan waivers, good monsoon leading to high rural consumption, possible shift of demand from diamonds to gold and central government employees’ wage hike will all boost gold demand in the coming months.

Apart from gold, even silver imports have picked up in the first six months of 2017 to around 3,050 tonnes, compared to 3,546 tonnes in the whole of 2016.

Silver imports are more price sensitive. With silver prices falling sharply in the last quarter compared to gold, imports could only go up further, say experts.

After the government announced demonetisation of Rs 500 and Rs 1,000 notes in November 2016, gold demand shot up and even after that, it remained strong as prices were low.

Fear of high GST rates for precious metals contributed to that.

GST on gold and jewellery could play spoilsport in the near future till jewellers and artisans get converge to it.

Several jewellers imported gold to replenish their unaccounted gold with officially imported gold, which would be shown on the books when GST would be implemented and sell jewellery made from unaccounted gold before GST.

Stores remained quite busy till June and according to Sudheesh Nambiath, lead analyst, precious metals demand, GFMS Thomson Reuters, “Large jewellery manufacturers have seen volumes higher than the monthly average through April to June. Investment led demand has also turned stronger as there has been an increased interest to stash away cash in gold which many believe may be difficult post GST.

"Our estimate is that at least one-third of the wedding related demand that comes up in the fourth quarter has been advanced.”

This means that the increase in demand in the last few months is a borrowed demand from future.

The October-December quarter usually remains busy with festive season demand coming in along with agri-centric gold demand after a good monsoon and higher realisations for farmers.

That has been the case traditionally. However, some demand, which would have come during this period, has already been met in advance before GST was introduced.

Surendra Mehta, secretary, Indian Bullion and Jewellers Association said, “Gold demand will continue to remain good even after the 3 per cent GST.

"In the next six months, gold imports could be 400-500 tonnes as demand from precious stones like diamonds could shift to gold.”

Diamond will also now attract 3 per cent GST.

There are other issues in diamonds, especially on whether they are original and the fear of them being synthetic.

Mehta also said that falling gold prices with strong rupee also makes gold attractive rubbing off the GST impact.

However, there are some reasons to be conservative on immediate gold demand.

The government recently mandated that for purchases over Rs 50,000, the buyer would need to provide permanent account number or Aadhaar.

Such measures are intended to curb the growth of the unofficial market.

The World Gold Council, in general, is of the view that jewellers and artisans will need time to adjust to new GST norms, which could take a little time.

Alistair Hewitt, director, market intelligence, World Gold Council, wrote in an article that apart from good monsoon which will boost rural demand, “remonetisation, inflation-busting wage hike for central government employees and pensioners will support consumption.”

Photographs: Kham/Reuters; Lisi Niesner/Reuters and PTI Photo.