Thursday, 23 May 2013

Introduction to Jewelry Industry


Gold Bengals India has been the world's single largest consumer of gold, a position it has held since even before the three-decade-long Gold Control was abolished. Following the abolishment of the act, gold imports became a part of the mainstream economy as the government rightly intended.

During the last decade, the gold market fundamentals began to turn positive, thanks to the grim global economic events, setting stage for what has now been an over a decade-long bull rally. During this period, the gold price increased manifold from under ì 5,000 per 10 grams to over ì 30,000, with Indian demand relentlessly growing to a record of over 1,000 tonnes from a low point of around 500 tonnes. In value terms the increase was even more phenomenal. The most essential factor contributing to this was that the global investor-led rally generated higher price expectations, adding to the existing positives driven by customs and traditions and simple affinity towards the yellow metal. At the same time, the real economy turned dim, curbing prospects of returns elsewhere.

India's resilience towards the rising prices and volume of its off-take have been in the headlines for over a decade now And being a deficit market, unsurprisingly it had to rely on imports to feed its growing demand for gold, as local mine production is still just a fraction of the total demand. Putting two and two together, it was no rocket science in foreseeing that a combination of both rising gold prices and demand would mean a steady drain of foreign exchange. In a rather late response, the government-in-denial began to increase the import duty with an absurd expectation that it will restrict gold demand and thereby curb imports! In the first instance itself, it was evident that the government had failed in deriving a logical conclusion that when a 30% annual increase in the gold price had done little to curb demand (rather it had a contrary effect), why would a fractional increase in the import duty lessen demand, leave alone recognising the fact that there was and is genuine demand for gold?

Big Size Gold Bengals Since the first erroneous increase in the import duty to the recent hike, the government has repeatedly showcased a severe case of ignorance. 'There has been no decline in gold demand/imports, even of an ounce, linked to the higher import duty and won't be even if the duty is hiked further. Only real economic factors will influence gold demand and any coercive steps to misdirect it will only be in vain. However, what is certain is that the government will continue to abet a scenario where gold is slowly pushed Out of the mainstream economy, even if only temporarily. This will derail and discourage the industry's efforts towards becoming transparent and organized. But more worrying is the criminal burden the higher import duty will unfairly impose on families already battling the ills of higher inflation. They cannot but escape the customs and traditions of society in the light of the current account deficit situation (something the government intends to quick-fix via lower gold imports) and will still have to buy gold irrespective oldie hike in the import duty. For the remainder of the demand, expectations of higher gold prices will save investors from being discouraged, from investing in gold, against a 2% increase in the import duty It is in fact, unconstitutional and arbitrary to penalize consumers for buying gold as it interferes with their fundamental rights.

Jewelry setThere is no fix in increasing the import duty; it is rather an act of digging a well when there is a fire! There is a lot of hard work to be done elsewhere in order to fix the current account deficit. However, a bold contrary step, a suggestion that the import duty would be lowered by 2% in the second half of the year (and no longer than that), might result in slightly lower imports in the first half giving some breathing time to the government. By then hopefully other positive factors would have kicked in and issues elsewhere would be resolved. And that would help to bring the current account deficit within a comfortable margin. While there is no guarantee this might work, the reverse will surely not. Period!



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