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Major Indian bullion and jewelry markets, which are the largest in the world, went on strike 10 days ago after the government announced in its second budget that it would double gold import duties. India is the world’s largest gold importer and imposed a similar hike in January this year. Traders are asking the government to instead impose a one per cent tax in the form of value added tax (VAT) instead of excise duties which increase burden on smaller jewellers.
Industry insiders told The Economic Times that market closures have cost the industry between Rs 10,000 – Rs. 11,000 crore or about $1.9 – $2.1 billion in about 10 days. This comes as demand for gold is expected to pick up for the wedding season.
However, this doesn’t necessarily spell doom for gold.
A new report by SocGen analyst Dr. Michael Haigh suggests that the doubling of import duty on bullion is unlikely to have a long-lasting effect on the market:
“It should be pointed out here that the net change in the price of a product, when duty is doubled from 2% to 4% ad valorem, equates to a net increase of 1.96% in total and this is therefore not as onerous a change as some headlines would suggest.
…We tend to the belief that the duty may have a short-lived effect in the market and that the religious and investment significance accorded to gold in India will ultimately override the immediate impact. The market is price-elastic and dislikes volatility, but is capable of adapting to changes in price range after periods of time.”
Haigh says the recent weakness in the global demand for gold, which has seen gold prices in India off about 9 per cent from their December highs, is more significant than a short term rise in import tax.
So far, jewellers in New Delhi and Mumbai and other major cities have been on strike. jewellers in Kolkota and Chennai have kept their stores open.