Concerned with weakness in the Indian rupee which has implication of widening Current Account Deficit (CAD); the Government once again increased the import duty on gold from 8% to 10%. It is noteworthy that this the third increase this calendar year, intended to curb demand for gold in India, the world’s largest consumer of gold.
 

On an ascending trend

Data as on August 13, 2013
[Source: Ministry of Finance (Dept. of Revenue), PersonalFN Research]  

Apart from targeting gold, the duty on platinum too has been increased to from 8% to 10%, and for silver to 10% from 6%. And such a move is expected to fetch Rs 4,830 crore to the exchequer.

Moreover, the additional duty on gold dore bars is increased from 6% to 8% and for silver dore bars from 3% to 7%. Dore bars are semi-pure alloy of gold and silver mined from ore and are imported in the country for further purification. Likewise the excise duty too is hiked; where for refined gold bars it is increased from 7% to 9%, while for silver manufacturing from ore and silver / gold dore bars from 4% to 8%.

How much are the gold imports thus far?
In the fiscal year 2012-13, India imported 845 tonnes of gold valued at over Rs 2.45 lakh crore. And this was the main reason for CAD to hit a record high of 4.5% (at U.S. $87.8 billion) of GDP.

In the current fiscal year thus far (i.e. for the period April 2013 to July 2013) gold imports have risen 87% to 383 tonnes (from 205 tonnes in the same period last year). In value terms, the imports went up from Rs 56,488 crore to Rs 95,092 crore — an increase of about 68%. But despite such data on gold imports and persistent weakness in rupee, the Government is vowing to restrict the current account deficit (CAD) to 3.7% of GDP, or U.S. $70 billion in the current fiscal.

And going forward how would be the trend for gold imports?
Well, going forward too, demand is going to build-up as we approach the festive season. In fact, stockists are already piling up their inventory to meet demand ahead of the festive season (which runs from August to November). It is noteworthy that according to the World Gold Council (WCG) shipment of gold to India is expected to reach at around 900 tonnes level in calendar year 2013 due to rise in demand following lower prices.

At present the acquisition cost of gold has shot up with hike in import duty and weak Indian rupee. In such a scenario, PersonalFN is of the view that this would further buoy-up smuggling activity for 'tola' bars (or unnumbered gold bars) in the country. Smuggling activity in gold has been resurrected recognising the fact that India has an insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. It is noteworthy that, as many as 220 cases (worth Rs 59.82 crore) of gold seizure were detected in the April-June period this year, as against 204 cases (worth Rs 12.86 crore) in 2012-13 and 64 cases (worth Rs 9.82 crore) in 2011-12.

Our view on gold:

With economic uncertainty surrounding the global economy, PersonalFN thinks that smart investors would view gold as a monetary asset rather than mere commodity and that would keep the long-term trend for gold intact until economic uncertainty recedes. Moreover, as long as the U.S. Federal Reserve continues with it bond-buying programme at its current pace, it would be supportive for gold.

One can take refuge under the precious yellow metal and add it to your portfolio from diversification point of view. At PersonalFN, we believe that, you should consider your investment time horizon and accordingly allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). Gold is not an instrument to make quick money but a solid long term asset and hence you should ideally invest in gold with a longer investment horizon.

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