Impact of Higher import duties on gold jewellers

In a bid to reduce the imports of gold, which has averaged around $6 billion per month on an average in the last few months, the government announced the sharpest increase in the import duty on gold. The government has effectively hiked the basic Customs duty on gold by 5%. This resulted in a 3% spike in the price of gold in the Indian markets as a reaction to this spike in the customs duty. Since a substantial of gold into India is imported, the 5% higher customs duty will directly translate into higher landed price of gold.

The government and the RBI have been unhappy with the spike in gold imports in the current year. The objection of the RBI is that gold imports actually use up precious forex resources to import a product that is, by default, unproductive. With the sharp spike in the gold import bill in FY22, the first priority is to cut this bill and these gold import duties are aimed at that. For instance, in FY22, the gold imports accounted for more than 8% of the total import bill and was next in size only to crude oil imports during the year.

While the import duties on gold were raised sharply, the import duties on silver were kept static. The net effect of the gold import duty was overall lower. That is because while an additional import duty of 5% was imposed by the government, it also simultaneously withdrew the 0.75% social welfare surcharge. This effectively hiked the gold import duties by 4.25% from 10.75% to 15% overall. Government ha also hiked the import duty on gold for refineries from 6.9% to 11.85%.
 

People like P.R. Somasundaram, regional chief executive officer (CEO), India, World Gold Council, have warned that such an increase in duty will not only have an impact on domestic gold consumption and demand, but will also encourage a grey market in gold due to the hugely prohibitive rates of duties on gold. We have seen that happen in the past when gold used to be smuggled heavily and was routed through other markets like Dubai and Singapore. Let us focus on the more important aspect of the impact on jewellery business.

The general view in the market is that the sharp spike in the import duty on gold would hit jewellery sales in a market like India that is extremely price sensitive. That is likely to negatively impact most of the leading names in the field like Titan, Kalyan Jewellers, Thangamayil Jewellers etc. If the hike in the customs duty is temporary then it is OK, but if it is permanent then there is likely to have a deeply adverse impact on jewellery impact. However, a weak rupee has cushioned some of the price impact of higher duties.

For now, the jewellers are not yet panicking as most jewellers had huge inventories and hence could afford to go slow on fresh imports. As a result, the sudden surge in duty was taken smoothly by the gold market. As a result, the full transmission of duty hikes did not happen. However, other experts are of the view that higher interest rates raises the opportunity cost of holding gold and that is likely to push down and neutralize the gold prices. So the government may end up collecting more revenues without much impact.