Independent credit rating agency ICRA estimates that the demand for gold in the medium and long-term is expected to grow by 6-7%. These figures are in tune with the Interim Budget 2019 announcing an increase in the income tax exemption limit from the existing Rs. 2 Lakh to Rs. 5 Lakh.
The current 3% GST on gold will not have any negative impacts on this demand as the increase in disposable income may compensate it. Moreover, the growth of the organised sector of gold, increasing living standards, and a demographic replete with festivities will also contribute to the same.
Gold Consumption in India
India consumed around 760 tonnes of gold back in 2018. However, this was a decrease of 1.4% compared to the demand in 2017. Demand for gold coins and bars also saw a reduction of around 4% in 2018 due to the new GST rate.
Two factors that led to a decrease in gold consumption in 2018:
1- Price increase of about 6%.
2- Lower financing availability to retailers.
Several frauds by both lenders and bullion dealers came into the news. Thus, the lending sector became more stringent when sanctioning loans to this market.
These restrictions slowed the expansion of the unorganised sector as they did not have ample capital to expand their business and increase working capital.
The Unorganised Gold Sector
This sector consists of gold imported to this country through illegal channels. Gold consumption from this sector was around 90 to 95 tonnes in 2018, a decrease from the 115 tonnes one year back.
The primary reason behind the existence of this unorganised sector is the 10% customs duty. Thus, importers have to impose a high price tag on products both because of this import duty and also because of the GST on gold.
Gold Imports from South Korea
India’s Free Trade Agreement with South Korea only requires importers to pay an IGST of 3%. One of the GST benefits was the elimination of a 12.5% countervailing duty paid when importing.
However, bullion dealers have to obtain a licence from the Directorate General of Foreign Trade (DGFT) to do so. This license was made mandatory back in 2017 after gold imports from South Korea increased to more than $338 million in the same year. Only a year ago it was around $70 million.
Factors Behind the Increasing Demand for Gold
1- Wedding Season
The wedding season from September to January is expected to lead to an increased demand for gold irrespective of the GST on gold according to ICRA. Other than a growing disposable income, the quicker and easier availability of financial assistance comes up as another leading stimulant to drive the market forward.
2- Increase in Per Capita Income
The per capita income grew around 8.6% back in FY 2017-18. It is all set to grow by double digits to 11.1% in 2019-20.
3- Favourable Rural Income Growth
A rise in income of rural India is another contributing factor. The last two years saw ample rainfall leading to adequate produce, a given stimuli towards increased rural income. A majority of farmers purchase gold as a traditional way of investment.
Thus, ICRA determines that the demand for gold is all set to rise even with the implementation of GST. Knowing what is GST can help individuals to learn its effects on gold jewellery.