X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Will India Glitter? - Outside View by Chirag Mehta

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Will India Glitter?
Feb 28, 2011

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."
The increase in gold rates, the rise in customs as well as the record level gold purchase and consumption in 2010 will provide the Finance Minister a window to further hike the customs duty on gold.

Gold Prices and Customs Duty

As estimated in the below table, there is a high possibility that the customs duty will be increased further by Rs. 100 to Rs. 400 per 10 grams of gold. This would adjust the customs duty expressed in percentage of gold price to be around 1.8 - 1.9% to match the levels of the hike in customs duty during last budgets. Also, going by the Finance Minister's speech on the rise of prices of precious metals, "Since the customs duty is levied on these (precious metals) at specific rates, I propose to index the rates on gold and platinum, from Rs.200 per 10 gm to Rs 300 per 10 gm." This indicates that a specific level of customs duty expressed as a percentage of gold price would be maintained.

Table: Gold prices and customs duty
Source: LBMA, RBI, Quantum AMC and http://indiabudget.nic.in/

Can the increase be any higher?

Based on the revisions made in the customs duty over the last 2 budget sessions and considering the above table, there is a high chance that there could be an increase of 32% in the customs duty slab when expressed as a percentage of gold price. A 32% increase in slab rate would mean a customs duty rate of 2.4% in terms of percentage of gold price. This in turn could translate in a customs duty of nearly Rs. 500 per 10 grams in the coming budget.

Looking at the previous budgets, it looks increasingly probable that the hike in customs duty would be at least to the tune of Rs. 100, hence raising the customs duty from Rs.300 per 10 grams in 2010 to Rs. 400 per 10 grams in 2011. However, given that the attitude of the consumer towards gold purchase was not affected even with the price escalation, there is a high chance that there could be a much higher increase in customs duty for 2011-2012. In such a case, the increase could also be close toRs. 200 per 100grams, thus raising the customs duty level to Rs. 500 per 10 grams.

With the Indian consumer's fascination towards gold and inflation on a rise, only time will tell how the budget will actually deal with this glittering spectacle that is one of the best keepers of value.
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.

Equitymaster requests your view! Post a comment on "Will India Glitter?". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

These Are the Kind of Blue Chips You Should Invest In(The 5 Minute Wrapup)

Nov 9, 2018

All blue chip companies are large caps but all large caps are not blue chips.

Get this Small Cap Logistics Company at a 16% Discount Right Now...(Profit Hunter)

Nov 6, 2018

If you turn the clock back, the current macroeconomic climate is nothing new. The markets have seen them all, and every downcycle has been succeeded by gravity defying gains...more so in the small cap space. This time will be no different.

Insider Buying: These Owner Operators Are Taking Advantage of the Correction(Chart Of The Day)

Nov 2, 2018

We believe insider buying is one of the strongest smart money indicators.

Are You Among The 35% Parents Who Will Not Be Able To Finance Their Child's Future?(Outside View)

Nov 1, 2018

PersonalFN explains the importance of being prepared for your child's future.

Are Fund Houses Opening Up Their NFO Factories Again?(Outside View)

Nov 2, 2018

PersonalFN sheds light on FY 2018-19 so far, the mutual fund industry has collectively launched 84 New Fund Offers (NFOs), of which some are still open for subscription.

More

Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS