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Heraeus Precious Appraisal

  • Edition 23 - 15July 2019

A taxing time for gold in India

Lower gold demand is likely in India in the second half of the year, as higher prices and lower rural incomes could combine to constrain purchases.

Higher import duty will crimp gold demand. The Finance Minister announced an increase in the import duty to 12.5% from 10% in the recent budget. The Indian government has raised the duty payable on gold imports several times over the years, and changed other regulations, to try to reduce the trade deficit, as most of the gold used in India is imported. While officially reported demand might fall, the increase in import duty will encourage smuggling.

The gold price is near a record high. Gold imports into India were up 26% year-on-year through May as the price fell from the highest level seen in more than five years in February. Retail demand was strong during the Akshaya Tritiya festival in May because of the lower price. India is the second-largest gold market and last year the country’s demand was 760 t (source: World Gold Council). Almost 80% of that was jewellery demand, with the balance being bars and coins. Any similar pullbacks in the price will see jewellery fabricators take advantage to add to stocks at a lower price ahead of Diwali in October, which is an auspicious time to buy gold, and the wedding season. However, with the goldprice expected to keep climbing, demand will struggle to reach 2018’s level.

Poor rains mean lower rural gold demand. Around two-thirds of India’s gold demand comes from rural areas. Rural incomes depend heavily on agriculture and the monsoon rains are important to provide irrigation for crops. The onset of the monsoon was a week later than usual and, so far, over half the country has had 12% lower than normal rainfall. A slightly below average monsoon season is expected this year. If crop yields are impacted then rural incomes will be reduced and spending on gold will fall.

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