Web Sify
Follow us on
Mail
Print

Bullion dealers urge government to buy back gold from consumers

Source : BUSINESS_STANDARD
Last Updated: Tue, Aug 21, 2012 19:02 hrs
A salesman arranges a gold necklace inside a gold jewellery showroom in Kochi

Worried over the finance ministry's efforts to curb gold imports that may create long term negative impact on its availability in the country, bullion dealers have urged the government to allow banks to buy the metal back from consumers.

Currently, banks only sell gold to consumers in the form of coins and bars. But, once they start buying, even the government measures to restrict import would not hamper gold supply for domestic consumers, said Prithviraj Kothari, president of the Bombay Bullion Association (BBA), the Mumbai-based premier bullion dealers' body.

In an attempt to control the current account deficit, the finance ministry has quadrupled the import duty on gold since the beginning of this year to four per cent in order to restrict its import into the country. With a sharp rise in the import bill and an economic downturn, India's current account deficit (CAD) shot up to $78.2 billion (4.2 per cent of gross domestic product) for the year ended March 2012, from $46 billion (2.7 per cent of GDP) in the previous year. This is the highest level of CAD ever - both in absolute terms and as a proportion of GDP - according to the Reserve Bank of India (RBI).

For the quarter ended March, CAD rose to $21.7 billion (4.5 per cent of GDP), compared with $6.3 billion (1.3 per cent of GDP) for the corresponding quarter of the previous year.

Considering gold purchase as an unproductive asset, the government also directed the RBI to introduce an instrument with gold-like returns.

Meanwhile, the BBA on Tuesday announced a few proposals for the consideration of the government to bring India's gold imports down.

"Rise in import duty has resulted in lower imports in 2012. But if gold declines in future, imports would pick up," he told reporters on Tuesday.

Traders believe that bullion imports can be brought down without affecting the supply of bullion into the market through a series of measures.

To provide a long-term solution for curbing gold imports and controlling the country's CAD, BBA is planning to allow banks to hedge and re-export gold, finished goods, introduce more options in paper products and a gold depository scheme.

Currently, banks charge 1.85 per cent of value added tax (VAT) for gold supplied by them which makes the precious metal costlier. Kothari urged the government to waive the VAT to control its import into the country.

If banks are allowed to hedge gold on behalf of consumers and re-export it, then India would become a price setter from the current position as a price taker, Kothari said.

There is very little risk in allowing banks to hedge gold, margins are high and the interest rate on gold hedged is huge.

"Global players don't know how much gold is being sold by the Indian market. They only see that we are exporting, which would put India in a position to control price," Kothari said.

In the last two years, China has outrun India in terms of gold imports. Despite this, India remains a celebrated player in the gold market.

Over 11,000 tonnes of gold have been imported in the last five years.

"This is sufficient gold compared to any depository," Kothari said.

There is over 25,000 tonnes of gold in Indian households alone. If the government starts a long term (for instance, a seven-year) deposit scheme with an annual incentive of 1-2 per cent, then the deposited gold can be brought into the market as recycled gold for a long term period, thus reducing the need to import gold from the international market.

Apart from this, BBA also proposed introducing more options in paper products like exchange traded funds.

He said that India's gold imports would decline nearly 40 per cent to 200-250 tonne in the second half of the year owing to weak monsoon and rising prices.

Gold price in Mumbai's Zaveri Bazaar went up by Rs 40 to Rs 30,090 per 10 gm on firm trend in global market.


More from Sify:
blog comments powered by Disqus
most popular on facebook
talking point on sify finance