By Chirag Sheth, Principal Consultant, Metals Focused
Precious metals demand in India was severely affected by COVID-19, with gold and silver demand falling by 42% and 36% respectively in 2020. That said, signs of an economic recovery have recently emerged, which has translated into improving demand for precious metals. The easing of lockdowns, a good monsoon and falling infection rates have all helped, effectively allowing gold and silver demand to benefit from wedding-related purchases and the release of pent-up demand. More recently, a reduction in import duties has provided an additional boost to the industry.
Before looking at jewellery it is worth understanding recent developments concerning import tariffs. In early February, the Indian government unveiled its budget for the upcoming fiscal year (April 21 to March 22). One highlight was the cut in import duties across much of the precious metals complex. The reductions were significant, considering that India had progressively raised customs duties on precious metals over an extended period, from 2% in 2012 to 12.5% in 2019. As a result, the industry has been calling for these to be reduced for some time. This was largely because of the impact on unofficial imports (particularly gold), which became more profitable under the high-duty regime and, to some extent, hampered the growth of the organised industry.
To help support the supply chain, the Indian government announced several fiscal changes. First, the basic customs duty (BCD) on unwrought/semi-manufactured gold and silver was lowered from 12.5% to 7.5%, and on unwrought platinum and palladium to 10%. Second, gold and silver doré bars will now attract 6.9% and 6.1% customs duties respectively, compared to 11.85% and 11% previously. That said, gold and silver imports (including doré) would now be subject to an Agriculture Infrastructure and Development Cess (AIDC) at the rate of 2.5% and a Social Welfare Surcharge (SWS), which stands at 10% of the BCD.
Effectively, the tax on gold and silver bullion will be 10.75% (7.5% + 0.75% SWS + 2.5% AIDC). On gold doré, the effective import duty comes to 10.09% and for silver doré, 9.21%. The differential between refined gold and doré now stands at 0.66%, up from 0.65% earlier. The differential for silver has increased from 1.5% to 1.54%. For platinum and palladium sponge and powder, only the SWS is applicable, hence the effective duty on both also comes to 11%.
Our discussions with key trade associations in India have revealed that most expect the import duty cut to underpin a recovery in demand in the short-term as consumers react to lower prices. However, a strong economic recovery is more important for demand in the longer term. In that regard, over the last few months many leading indicators have improved, including the Index of Industrial Production (IIP) and Purchasing Managers Indices (PMIs), which in turn have seen GDP forecasts for 2021 revised higher. Other important metrics, such as automobile sales, suggest that consumer sentiment has also turned positive since late last year.
THE PICK-UP IN ECONOMIC MOMENTUM HAS TRANSLATED INTO IMPROVED DEMAND FOR THE YELLOW METAL IN INDIA
Turning to the impact on the country’s jewellery markets and looking first at gold, the pick-up in economic momentum has translated into improved demand for the yellow metal. Our discussions with supply chain participants have revealed strong month-on-month growth since the onset of the festive and wedding season in October. This partly reflects bargain hunting after the gold price corrected in November, a release of pent-up demand, the easing of lockdown measures, strong rural economy and extended wedding season. While the market is currently supported by healthy demand from rural and semi-urban India, improving economic conditions should also help urban gold jewellery demand receive a strong fillip this year.
By contrast, despite an upbeat rural sector, Indian silver jewellery demand has not experienced a significant improvement. This mainly reflects the sharp increase in the local silver price, which touched a record high last year in rupee terms and has since remained quite volatile. This year, rising and volatile prices will continue to present a headwind. In particular, high silver prices could encourage fabricators to introduce lower purity items to help keep retail prices affordable for rural communities.
Overall, the improving macro-economic backdrop across much of India is likely to lift disposables incomes and in turn, benefit consumer sentiment. So far however, the appetite for high-value products has been relatively subdued, aside from need-based purchases like weddings, suggesting the recovery will take a little time to develop. It is also important to be mindful that the pandemic remains a key risk to the Indian economy. However, as the wedding season is now likely to continue until July (reflecting the dynamics of the Hindu calendar), gold and silver jewellery demand should ultimately stage a more meaningful recovery over the new few quarters