GST impact: Gold investment demand to leapfrog in near term

Enhanced transparency brought in by the introduction of GST said to be the cause

Investment products, including paper gold, bars, and coins, are likely to see their share in the country's overall gold demand leapfrog to 33 per cent, from the current share of nearly 22 per cent, in the coming years due to an increase in the overall transparency in the bullion trade through the implementation of the Goods and Services Tax (GST). 

A World Gold Council (WGC) report estimates that India’s investment gold (bars and coins) demand stood at 72.7 tonne for the January–June period in 2017, compared to 59.8 tonne for the corresponding period last year. Investment gold demand constitutes around 24 per cent of India’s overall gold demand for the first half of the current calendar year, which stood at 298.4 tonne. In the corresponding half of the previous year, however, gold investment demand worked out to be 59.8 tonne, comprising 26 per cent of the overall January–June gold demand in 2016.

For the quarter ended June 2017, overall investment gold demand contributed 40.7 tonne, or 24 per cent, to the overall demand of 167.4 tonne. During the corresponding period last year, however, investment gold demand stood at 32.3 tonne, amounting to 26 per cent of the overall quarterly demand of 122.1 tonne. The remainder of the country's gold demand comes from the jewellery segment demand. 

"Currently, consumers buy gold in the form of chains, rings, etc and keep them as stores of value. But, with transparency coming in through the implementation and strict enforcement of the GST, demand for products like sovereign gold bonds, bars, and coins is going to increase. We assume that the demand will rise to the level of 33 per cent in the near term," said Somasundaram PR, managing director (India), WGC.

At present, bars and coins, assumed at 15 per cent of overall gold trade in this category, are understood to carry a high risk of low purity. Consumers, therefore, prefer gold jewellery to bars and coins.

The current duty component of 10 per cent as customs and three per cent as GST is much higher than the level of two per cent as customs and one per cent as value-added tax, respectively, that was prevailing before the government raised the import duty in phases to 10 per cent.

"India faced current account deficit (CAD) problems then, which does not exist any longer. Hence, time is opportune to cut import duty substantially to reduce gold import through illicit sources. GST is set to change consumer behaviour, with more people coming into bars and coins," Somasundaram added.

Electronic payments platforms like PayTM might also get into jewellery, bar, and coin retailing in the future. Such platforms, which are KYC- (know your customer-) compliant and also traceable, might attract consumers.