Going for gold

The increase in the duties and levies on gold in the Budget are only a continuation of earlier initiatives aimed at curbing the appetite for the metal.

THE Rs.3-lakh crore domestic jewellery industry has been in jitters ever since Union Budget 2012-13 extended the existing levy of 1 per cent excise on branded jewellery to unbranded jewellery too. Branded jewellery forms only 6 per cent of the domestic jewellery industry, whereas unbranded jewellery accounts for 94 per cent. In order to simplify the operation of the levy and minimise its impact on small artisans and goldsmiths, it has been made applicable only on a tariff value equal to 30 per cent of the transaction value. Because of this, the effective excise duty on jewellery could be around Rs.90 per 10 grams. This move aims to garner an additional revenue of Rs.150 crore to Rs.200 crore annually. Besides, tax collection at source was also proposed, whereby a consumer buying jewellery worth Rs.2 lakh and above would have to fork out 1 per cent additional tax.

The excise duty on branded jewellery, purported to prevent revenue loss to the exchequer amounting to crores of rupees, was deftly circumvented by most makers of branded jewellery, who began selling jewellery without a brand name. Bringing unbranded jewellery into the excise duty net removes this loophole. The making of unbranded jewellery is process-intensive and entails the movement of goods across locations. The makers of such jewellery are worried about the harassment they feel they are likely to face from the tax authorities because of the proposed levy.

Fearing that the authorities would swoop on jewellery marts on the slightest of pretexts, bullion trade bodies across the country protested by downing shutters continuously for three weeks, incurring an estimated loss of Rs.20,000 crore to business and also causing a revenue loss to the exchequer of Rs.700 crore.

When the government remained impervious to their protests, the bullion bodies met Congress president Sonia Gandhi and Union Finance Minister Pranab Mukherjee on April 6. Reports suggest that they can hope for some relief when the Finance Bill is moved for consideration in the Lok Sabha in the last week of April, after its three-week recess. Critics contend that when the onus is on buyers to fork out the excise levy and they do not have any effective lobby to plead with the government, the assurance of a rollback of the excise duty will only embolden traders to generate black money as they can then avoid registering with the authorities for the payment of the levy.

In India, gold holds perennial sway as a sure-fire investment option, which is manifest in the purchase of bars, coins and gold exchange traded funds (ETFs) by people with disposable incomes. It is small wonder that the budgetary proposals on gold have exercised the industry and trade alike, who feel that their sacred tie to the relic of the barbaric era, as gold was described decades ago by the celebrated economist John Maynard Keynes, is being shaken, if not snapped.

In the Budget, the Finance Minister also increased the basic customs duty on standard gold and platinum bars from 2 per cent to 4 per cent and on non-standard gold from 5 per cent to 10 per cent. The customs duty on gold ore/concentrate and dore bars for refining was increased from 1 per cent to 2 per cent. As recently as January, the customs duty on gold was raised from 1 per cent to 2 per cent, and the Budget raised it to 4 per cent. Both the trade and consumers will get buffeted by this tax on bullion, with the increase in customs duty and excise adding up to Rs.825 per 10 gm on the current price of gold.

Unproductive asset

One does not have to go far to find out what compelled the authorities to turn their eye on gold and come out with a slew of steps to discourage its purchase. Last year in November, spot prices of standard gold shot up to as high as Rs.29,140 per 10 gm, marking a rise of 40 per cent. As the appetite for unproductive assets such as gold is unrelenting, the burden this cast on the import bill was too strenuous to bear. Gold imports were estimated at $40.5 billion (11 per cent of imports) and silver at $1.9 billion (0.5 per cent of imports) in the whole of 2010-11. Together these amounted to a hefty $54.5 billion in the first 11 months of 2011-12 (April to February), which amounted to 12.6 per cent of aggregate imports.

It became clear in the latter half of 2011-12 that the growing import of yellow and white metals threatened to strain the balance of payments by widening the current account deficit (the gap between total import of goods, services and transfers and the total export of goods, services and transfers). So a worried government had to rejig the duty structure in January from a flat rate of Rs.300 per 10 gm to an ad valorem levy of 2 per cent. Alongside, the excise duty on gold was also changed to 1.5 per cent of the value as against the prevalent fixed rate of Rs.200 per 10 gm. The January 17 move was aimed at checking the growing current account deficit, halting the depreciation of the rupee and partly making good the shortfall in revenue collections as the revenue yield was estimated at Rs.500-600 crore for the remaining months of 2011-12.

By increasing the duty, the Budget only continued with these initiatives, though the Economic Advisory Council to the Prime Minister, headed by former Reserve Bank of India (RBI) Governor Dr C. Rangarajan, had suggested in its report in February that the best means of limiting the appetite for gold is to work towards making other kinds of assets more attractive, especially such financial assets as lend themselves to ready mobilisation for funding infrastructure and industrial asset creation. While this unequivocally flagged gold as an unproductive asset that stayed in the coffers of consumers rather than as an asset that could be used readily for other purposes, lakhs of people do keep a small quantity of gold handy to pledge for money in emergencies.

It is small wonder that the RBI sensed this when it revised its guidelines on the gold loan business of non-banking financial companies (NBFCs) on March 21 and prescribed a loan-to-value of 60 per cent LTV is calculated as a percentage of the loan to the value of gold jewellery kept as collateral. The limit was lowered because some private NBFCs reportedly offered loans against the yellow metal at an LTV of over 70 per cent. As NBFCs have at least half of their assets (advances) in gold loans and are aggressively expanding, this limit was needed to reduce the risk perception to the financial system. Together, all these concerted actions of the authorities and the apex bank demonstrate unmistakably the underlying objective that the gyrations in gold prices and the hefty import bill because of the high-value import of gold need to be managed and managed well if the economy is not to be held hostage by them.

Although the hedging of risks by policy-induced measures are appreciable, questions also pop up as to the blatant incongruity of the central bank buying a massive quantity of gold, about 200 tonnes, from the International Monetary Fund when the latter sold it in November 2009. The world might have shed the gold standard decades ago, but India's apex bank makes no bones about bolstering its reserves kitty by lapping up gold on sale from global agencies such as the IMF. This will only make people think that just as the RBI keeps gold in reserve for emergencies, they too can keep their gold as jewellery or as bars/coins in the absence of any worthwhile portfolio of investments that can give them a fair return.

Interestingly, the hike in duty (customs and excise) in the Budget will affect the export-oriented and employment-intensive gem and jewellery segments.

The Finance Minister may have stirred a hornet's nest and this may have far-reaching ramifications for all stakeholders. But, sadly, he did not come up with any pragmatic measures to wean people away from their perpetual crush on gold. This is amply borne out by the fact that India imported a record 958 tonnes of gold last year despite all the curbs, controls and rising levies in place to deter people from their fascination with the fabled metal.