Gold-buying in the world's capital for gold consumption has been sluggish lately. The reason behind the slowing purchases of bullion directly related to an approaching decision by the government on a new budget. Most buyers were hoping to see import tariffs on the yellow metal reduced for the new budget, deciding to hold off on making new purchases just in case regulations became more favorable.
In actuality, the government went the other way. When the country's finance minister announced this year's budget, not only did the import tax on gold remain unchanged, but insult was added to injury by a 1% increase in the sales tax on gold jewelry.
As you can imagine, people were unhappy with the move. It's the first time India has imposed a sales tax on jewelry sales in four years. On top of that, imports on gold doré bars (crude bullion that's about 80% pure and comes directly from a mine) also received a 0.75% tax hike to 8.75%. Finance Minister Arun Jaitley is heaping more and more obstacles in the way of the country's gold consumers, who already are forced to find ways around a value-added tax (VAT) on the metal.
The government has also been pushing its so-called "gold monetization schemes"—doesn't that just sound suspicious?—that encourages people to trade in their precious metals for "gold-backed bonds" and other financial instruments. Thus far these schemes have attracted little to no interest from the public.
Gold Jewelers Respond
Due to these new excise taxes meant to discourage gold purchases, an already disappointing sales season for India's gold shops is expected to get worse. Poor harvests for the country's rural farmers puts less money to spend in their pockets, and the higher duties on gold are exacerbating the sharply higher gold prices to start 2016. The approaching spring is typically a period of strong gold-buying, as many Indian families hold weddings this time of year.
In response to the government's new regulations, India's gold jewelers are planning a three-day strike beginning today. The All India Gems and Jewellery Trade Federation, representing more than 300,000 gold dealers around the country, as well as the India Bullion and Jewellers Association, are both planning to shut down business unless the government changes its stance.
This isn't the first time that India's gold jewelers have exerted their influence on the finance ministry's gold policies. In 2012, a nationwide strike prompted the last administration to scrap plans for just such an excise tax on gold sales—although it replaced that policy with a burdensome 10% import duty on incoming gold shipments, instead.
Although the government's stated intention is to curb gold purchases, the most likely effect of all of these regulations is merely an increase in gold smuggling and "irregular business practices," such as undocumented, under-the-table gold sales.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.