Gold imports by India, the world’s largest consumer, are plunging as an increase in tax and restrictions on financing shipments boost costs for jewelers, helping the nation contain a record current-account deficit.
Shipments in June will decline as only orders placed before the curbs are being imported now, said Rajesh Mehta, chairman of Rajesh Exports Ltd. (RJEX) Overseas purchases tumbled to an average $36 million a day in the 14 business days through June 7, compared with an average $135 million a day through 13 days until May 20, Raghuram Rajan, chief economic adviser in the Finance Ministry, said in a statement on June 11.
India’s rupee slumped to a record this week partly on concern that the current-account deficit will widen from an all-time high in the last quarter of 2012. Imports surged in the past two months as buyers thronged shops for ornaments, coins and bars after bullion entered a bear market in April as investors sold the metal in favor of riskier assets on speculation that the global economy was recovering.
“The measures taken by the government will work because gold has been made more expensive, and in the next two-three months we should see gold imports coming down,” said Dharmakirti Joshi, chief economist with Crisil Ltd., the Indian unit of Standard & Poor’s. “Many people had frontloaded purchases because of the price drop, and if inflation declines then the attractiveness of gold as a hedge will drop further.”
The government raised the import duty to 8 percent from 6 percent on June 5, a fourfold increase from January last year. The central bank has also placed restrictions on overseas purchases on a consignment basis and limited imports for local consumption against cash only. The curbs will change the financial models of jewelers in the country, said Bhaskar Bhat, managing director of Titan Industries Ltd. (TTAN) Shares of Titan and other jewelers have slumped in Mumbai this week on concern rising import costs may hurt their profit margins.
“The intention of the government is that imports have to be curbed and it has begun to work,” said Bhat, whose Titan is the nation’s biggest jeweler by value. “In the last seven or eight days, imports have come down significantly.”
The shortfall in the current account, the broadest measure of trade, was $32.6 billion in the last quarter of 2012 and is the biggest risk to the $1.9 trillion economy, according to the central bank.
Finance Minister Palaniappan Chidambaram appealed to Indians to “resist the temptation to buy gold,” saying reduced imports may help tackle the current-account deficit and the weakness in the rupee.
“If there is less demand in the next six months, then there will be a dramatic impact on the current-account deficit and every other market,” Chidambaram told a briefing in New Delhi today. “To think that gold is the safest investment is wrong and people should put their money in other saving instruments.”
Imports were 117 metric tons in April after prices plunged to a two-year low, according to Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation. Purchases were estimated at 162 tons in May, according to the Finance Ministry. Shipments may decline by as much as 20 percent in 2013 from 860 tons a year earlier because of the tax increase, according to Bachhraj Bamalwa, a director at the federation.
“In the longer run, it may not be the solution, but gold is a large component of imports and is deemed to be unproductive so the government is trying to make gold less attractive,” Crisil’s Joshi said. The decline in imports may bring down the trade gap in the second half of the year, he said.
While demand for bullion is typically low during June and July in the absence of weddings and festivals, a slump in the rupee to a record low against the U.S. dollar will make the metal more expensive for buyers, according to Prithviraj Kothari, managing director of RiddiSiddhi Bullions Ltd.
The rupee touched an all-time low of 58.9850 on June 11. The currency’s 6.7 percent drop against the dollar this quarter is the biggest in Asia.
Gold for immediate delivery was at $1,386.16 an ounce at 4 p.m. in Mumbai today, down 17 percent this year. Prices reached a two-year low of $1,321.95 on April 16 after rallying for the past 12 years in the longest bull run in at least nine decades.
The curbs on bullion imports and financing will increase the debt levels of jewelers, Titan’s Bhat said. Jewelers may be forced to pass on the increase in import costs to consumers, Rajesh Exports’ Mehta said.
“These regulations will affect cash margins of jewelers due to higher cost of funding as equity or unsecured domestic loans will be used to fund purchases and inventory will have to be fully paid for in cash compared with gold on lease earlier,” Goldman Sachs Sachs Group Inc. said June 11.
Shares of Titan rose for the first time in 10 days in Mumbai today after plunging 32 percent in the last nine days, the longest losing streak since September 2008. Titan climbed 4.5 percent to 213.75 rupees, Gitanjali Gems Ltd. (GITG), the largest retailer by revenue, rose 0.5 percent to 532.65 rupees and Tribhovandas Bhimji Zaveri Ltd. (TBZL) rallied 3.1 percent to 203.60 rupees, after declining 19.4 percent in the previous three sessions. Rajesh Exports dropped 1.7 percent to 116.65 rupees.
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