India, the second-biggest gold consumer, may ease controls on imports after Narendra Modi’s victory in national elections, according to Bachhraj Bamalwa, a director with the All India Gems & Jewellery Trade Federation.
The government will probably cut the 10 percent import tax in July and relax rules which require importers to supply 20 percent of purchases to jewelers for re-export by the middle of June, Bamalwa said by phone from Kolkata.
India represented about 25 percent of global demand in 2013, the World Gold Council says. Modi’s opposition bloc secured the biggest win in 30 years, defeating the Congress party which governed India most of the time since independence in 1947. He promised to bolster growth and development and his victory lifted stocks and the rupee. While the stronger currency and narrowing current account deficit allow room to ease gold curbs, it may not be at the top of his agenda, Crisil Ltd. said.
“It’s not the burning issue right now,” said Dharmakirti Joshi, the chief economist at Crisil, part of Standard & Poor’s. “It’s one of the items on their to-do list. The currency is strengthening and capital inflows being in a good position, it allows the government to taper it off in a pretty orderly manner. At least symbolically they should start doing it.”
Gold for immediate delivery advanced as much as 0.9 percent to $1,305.48 an ounce today before trading at $1,301.86 by 2:13 p.m. in London for an 8.3 percent advance this year. China overtook India in 2013 as the world’s biggest consumer with demand climbing 32 percent to 1,065.8 tons compared with a 13 percent increase in India to 974.8 tons, WGC data show.
A move to ease restrictions would improve supplies of gold to local jewelers before the festival season, which begins in August and lasts until October. India raised the import duty three times last year and linked imports to re-exports to curb a record current-account deficit and a plunge in the rupee.
The Reserve Bank of India may change the rule obliging importers to supply 20 percent to jewelers for re-export and 80 percent to the local market, while import taxes would be cut during the federal budget in July, Bamalwa said. The federation is seeking to meet the new Prime Minister after he forms his cabinet this month, he said.
“The 20:80 rule should be entirely scrapped,” Bamalwa said. “If the government comes up with an alternate mechanism, the problem will not be solved.”
A reduction in import taxes would start normalizing trade after a surge in smuggling, while tackling the 20:80 policy is the main way to boost imports, Crisil’s Joshi said. The BJP, led by Modi, won 282 seats, the biggest victory for a single party since 1984, enabling it to pursue an agenda without being constrained by coalition politics.
While India will change the 20:80 rule, it will probably replace it with something else such as quotas or an auction system to keep the current account deficit under control, according to Rajesh Khosla, the managing director at MMTC-PAMP India Pvt., the country’s biggest refinery. Freeing up imports as they were prior to 20:80 isn’t going to happen, he said in an interview last month.
“The government might reduce the import tax to 6 percent in the budget as smuggling is rising,” Prithviraj Kothari, vice president of the India Bullion and Jewellers Association Ltd., said by phone from Mumbai. “It’s still early days and the government may take a month or two to make changes.”