Customs Duty on Gold Increased – Will Gold Demand Come Down?

Gold has and will continue to be, one of the most widely trusted and invested asset classes in India – PERIOD.

There is no argument whatsoever on this and nor is this article an attempt to take anything away from Gold as an Investment. However, recently the Government of India has increased the Customs Duty on gold thereby increasing its price even further. The purpose of this article is to analyze the reasons behind this hike in customs duty and understand what may happen in future as a result of this hike…

Before we begin:

What is Customs Duty?

Customs Duty is the price or fee that we pay on products that are imported into our country.

Why does a Country have Customs Duty?

To protect the interests of the local manufacturers and producers. If something that is being made in India is sold at Rs. 10/- and you get the Chinese equivalent at Rs. 8/- would you buy the item manufactured in India?

This is exactly why we have Customs Duty – to ensure that items made/manufactured locally are used in place of imported items.

To All Smart Men & Women who know that India does not produce any Gold by itself and question my above explanation of “Why we have Customs Duty”:

India imports almost 99% or more of its Gold from other countries. So, technically this logic of why we have customs duty that is explained above does not apply to Gold. Why the government hiked the customs duty on Gold is totally a different reason and we will get to it very shortly!!!

Why was the duty on Gold Hiked?

India is the world's biggest importer of gold. This precious metal is the biggest contributor to the country’s import bill after crude oil. India's current account deficit reached an all-time high of 5.4% of its GDP in the July-September quarter. Alarmed by the mounting current account deficit, driven by large scale gold imports, the government was forced to raise the import duty on gold.

This reason could potentially raise a few other questions in your mind. They are:

1. What is GDP?

GDP Stands for Gross Domestic Product – It is the total value of all Goods and Services produced in the country in any given time period.

2. What is a Current Account Deficit?

India's total imports of goods, services and transfers is greater than total export of goods, services and transfers. This results in a deficit or shortfall which the country is trying to reduce.

3. Is a Current Account Deficit BAD?

Actually NO. Most developing nations including india have current account deficits but our deficit has reached unmanageable proportions and hence the government is trying to reduce it

4. Why does the Government Need to reduce this Deficit?

A widening current account deficit means we will be forced to depend on foreign currency capital inflow (A Technical term for a loan in foreign currency from a foreign country). The higher the loans we have, the greater the payments we need to make and hence the government is trying to cut the deficit

Will the hike in Customs Duty help the Current Account Deficit?

Personally – I DON’T THINK SO…

Actually speaking, this hike in duty will only help the current account deficit if the demand for GOLD comes down as a result of this. Do you think this will happen?

The answer to this question too is the same – I DON’T THINK SO…

Almost 90% of the Gold that we import ends up as Jewelry. Gold Jewelry is purchased for almost every single auspicious festival in this country as well as for all events like birthdays, anniversaries, marriage, child birth etc.

The Indian mindset that Gold is Wealth is one of the key driving factors behind this demand and I don’t think this increase in duty is going to affect it by much.

A few years ago I still remember gold price per gram was in 3 digit rupee numbers. Now it is has crossed 2000 rupees per gram and is still going up.

• Have we stopped buying gold?
• Have we reduced the amount of gold that is purchased for Marriages or any other occasion?

The answer to both these questions is a BIG NO.

On the contrary, the speculation that gold prices will go up further has actually fueled the demand for this precious metal even further. Isn’t it?


Is there any good news for the Government?

The original idea behind hiking this customs duty is to reduce the current account deficit and curb the excessive demand for Gold. However, if the demand does not come down, the government will at least end up with at least Rs. 15,000/- crores or more as the additional revenue due to this hike in duty on gold import.

So, either ways it is good news for the Government.

Is there any bad news for the Government?

Of course yes. Industry experts feel that this hike in duty may trigger a spurt in illegal smuggling of Gold.

Indian movies have been using the Smuggling of Gold as the GO-TO business for Don’s and Bad Guys for ages. Amitabh did it in Deewar, Rajnikanth did it in his movie “Thee” and every major hero or villain in the Indian film industry has smuggled gold on screen, at some point in their career.

The point here is - why did they smuggle gold illegally?

To avoid paying the 4% customs import duty

Now that the duty is 6% now, do you foresee this illegal activity increasing or decreasing?


My Final Words:

This hike in duty may not accomplish its intended goals of reducing the current account deficit or curb the demand for gold. However it may accomplish something that our government will be looking forward to – “Additional revenues of around 15,000 crores or more”

At the end of the day, Gold as an Investment will continue to attract investors and I don’t think anything will reduce the demand for Gold any time in the near future…

A Great Proposal by SEBI

As you might already be aware, Securities and Exchanges Board of India (SEBI) is the Governing body of all stock market related activities in India. Majority of the IPO’s that came out in the past 2 years have disappointed investors wherein the stock price tanked by a significant % on or immediately after listing. Retail Investor confidence in IPO’s has come down because of such examples. And then, there are some cases where the promoters went missing after the IPO and left investors in the lurch. Remember the article titled List of 87 Companies that Vanished after Raising funds through IPO?

As a result of this, the stock market regulator SEBI is currently mulling over a possible guideline that could protect the interest of the investors. This is a great proposal and the purpose of this article is to elaborate on the same!!!

What is this Proposal?

SEBI is considering options wherein investors will be reimbursed all or part of their investment if an IPO fails.

There are a lot of if’s and but’s surrounding this proposal and nothing concrete has been finalized yet, but, according to the news going around in the market, we can expect a few radical rulings that can help the retail investor.

These rulings could include things like:

1. A lower cut-off which if a stock price hits within the first few months after listing, the investor would have the right to claim a refund

The cut-off is expected to be a 20% fall within the first 2-3 months after listing

2. An upper cut-off on the amount of funds that will get reimbursed

The cut-off is expected to be Rs. 50,000/- per IPO

WHY??

The WHY part of this proposed rule is multifold. Let us look at some of the reasons one by one along the justifications…

Reason 1: Add a safety net or safety feature that would help attract more retail investors

Justification: A majority of the investors in India stay away from the equity markets, esp the IPO segment because of fears of loss. Many of the IPO’s in the recent past have tanked by 70% or 80% from their issue price which has significantly dented the confidence of investors. SEBI Feels that, if they add in such a safety feature wherein an investor could get all or part of his investment refunded in case of an IPO performing poorly, they would be more willing to subscribe to IPO’s

Reason 2: To control blatant overpricing of Shares

Justification: A lot of IPO’s come out wherein experts feel that the issue price is significantly higher than what the stock is worth. The reason according to SEBI as to why company’s come out with such issues is because company’s feel they can command a premium due to their name and most importantly nobody can do anything to them if the stock price tanks after the share gets listed. So, the company stands to pocket the money raised via the IPO and the investors are left to settle with losses. SEBI Feels that if such a refund feature is introduced, company’s will price their IPOs properly and not overprice them


My Take on this proposed Rule:

I feel that that is still a lot of untapped potential in the common Indian household when it comes to savings/funds available for investment. Because of the risky nature of investments, majority of investors in india prefer to stay away from the Equity markets and invest in safer options like Bank FD’s or NSC, PPF etc. If investors are given a safety option wherein they can apply for a refund if their investment isn’t performing as well as expected and salvage all or part of their investment, I feel that more and more people will begin investing in the stock market which can go a long way in boosting not only the Indian Stock Market but also India’s economy as a whole…

Try this:

Identify someone in your friends/family who is extremely averse when it comes to investing in the stock market (Someone like my dad – he compares investing in the markets to Gambling and still feels that what I am doing – in terms of investing in the markets is not a great idea).

Give them a choice:

Choice A: Let us invest 1 lakh in FD in the nearby bank which will give us Rs. 1,08,000/- at the end of the year.

Choice B: Let us invest 1 lakh in the upcoming IPO of XYZ Corp which has a huge potential for growth. In one year experts feel that the stock price will go up by at least 25-30%. Moreover, if the stock price falls by more than 20% in the first 3 months then, the company itself will re-purchase all the shares we bought at 90% of the original price we purchased. So, in the unlikely chance that the stock price tanks, we will get 90% of our money back.

Which one would you prefer…

I am pretty sure that most of those stock market averse people too would choose choice B because of the safety net feature that SEBI intends on bringing.

So, personally, I feel this is an excellent move by SEBI and I hope this becomes a rule very soon…

Happy Investing!!!