With the Union Budget 2011 , just around the corner, there is a lot of speculation about the announcements that will be made by the Finance Minister. Although during the previous budget, the government went vocal with its intent to curb inflation, it has received flak for its inability to control prices. Let's have a look at whether gold will glitter through this year's budget or not.

In a recap to last year: India's gold consumption reached peak levels of an estimated 800 tonnes even though prices surged to an all-time high last year. This spike in demand was influenced mainly by expectations that gold prices would continue to rise. Hence, there were those who thought that it would be the right time to purchase when price levels were relatively cheaper and earn profits as the price increases.

However, for such buyers, the recent fall in price has been quite disappointing. Short term markets are influenced by liquidity and sentiment values and are not based on long term fundamentals, hence it's quite difficult to understand and predict what might actually happen in the short term.

A breather for investors comes in the form of an increasing probability that the price of gold in Indian Rupees may move higher in the short term under the influence of the policy changes that may be brought up during the 2011-2012 annual budget where the Finance Minister is likely to announce an increase in customs duty for the third time in a row.

To provide a little more insight on the upcoming budget, here is a brief analysis created using extracts from the previous 2 Budget Speeches where there was an increase on the customs levied on gold

• 2009-2010: "Gold bars currently attract customs duty at the specific rate of Rs.100 per ten grams while other forms of gold (excluding jewellery) are chargeable to a duty of Rs.250 per ten grams. These rates were fixed in 2004 and have not been reviewed even as the price of gold has increased manifold. I propose to partially restore the incidence by increasing these rates to Rs.200 per ten grams and Rs.500 per ten grams respectively."
  
  
• 2010-11: "The prices of precious metals continue to rise. Since the customs duty is levied on these at specific rates, I propose to index the rates as follows: On gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams."

Source: LBMA, RBI, Quantum AMC and http://indiabudget.nic.in/

This is first of a 2 part series on customs duty on gold and government polices and reforms required for gold markets.

Chirag Mehta is Fund Manager, Commodities for Quantum Mutual Fund and manages the Quantum Gold Fund ETF and the Quantum Gold Savings Fund among others.

Disclaimer:
The views expressed in this Article are the personal views of the author Chirag Mehta and not views of Quantum Asset Management Company Private Limited(AMC), Quantum Trustee Company Private Limited (Trustee) and Quantum Mutual Fund (Fund). The AMC, Trustee and the Fund may or may not have the same view and DO not endorse this view.