Pre-Budget Views 2020

There has been a steep decline in jewellery sales over 12 months, and jewellers are facing adverse impacts of the slowdown because of the increase in gold prices, and a slowing of the overall economy.  Moreover gold prices have sky rocketed over the past few months which has further dampened the demand.

At present, gold attracts an import duty of 12.5 percent and a GST of three percent.

This increase in customs duty for cut and polished coloured gemstone is the biggest hit. Additionally, the increase in import duty on gold has had a spill effect and made the grey market stronger. With these duties, it becomes difficult to compete in the world market and export, as China is a major competitor. In fact in the past few years China has overtaken India as the world’s largest consumer of gold.

The volatility in the markets has also pushed gold sales down. Even though safe haven demand is there but in the retail jewellery market, the sales haven’t picked up much.

In the run-up to the Union Budget speech on February 1, 2020, Indian micro, small, and medium enterprises (MSMEs) in the gold jewellery segment are feeling the impact of the decline in jewellery sales. The country saw demand for gold falter in the second half of 2019. Some factors for the decline include a rise in international prices (India imports most of its gold), hike in import duty from 10 percent to 12.5 percent, and liquidity crunch in the Indian economy. And, the Union Budget 2020 could go a long way in alleviating some of these concerns if it focuses on lowering import duty on gold.

Jewellers hope for the volatile market to settle down. They are expecting Union Budget 2020 to come up with good policies to bring stability and better phases in the jewellery industry as there is an immediate requirement to cut down custom duty and import duty charges.

Hoping that this year’s Budget will provide for a reduction in duty on imports of cut and polished diamonds. The gold and jewellery industry is going through one of its toughest phases. However, gold jewellery exports grew 21 percent from November 2018 to November 2019, according to the Gem & Jewellery Export Promotion Council (GJEPC) data.

The Union Budget 2020 is expected to provide for a reduction in the import duty on gold because there is an immediate need for a cut in customs duty.

A possible import duty cut on gold in the upcoming Budget could curb smuggling and boost sagging imports. Commerce Ministry has reportedly asked for a reduction in import duty on gold to boost exports and manufacturing in the gems and jewellery sector. Import duty on gold was increased from 10 to 12.5 percent in the previous Budget.

Despite what the Budget may hold for the segment, volume growth for jewellers is expected to increase on the back of reintroduction of low-cost gold metal loans and likely stabilisation of gold prices at lower levels.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

Gold Is On The Move

So far in 2020, the yellow metal has been the best market to trade. Buy the dip has been the best possible scenario. We still have that scenario playing out. Gold is on the move. Risk aversion is pushing up gold prices. Weekend news showed that (the corona virus) is still spreading in many countries across the globe and this could impact economic activity and market sentiment.

As concerns about the impact of corona virus mount, investors have boosted holdings in exchange-traded funds backed by gold to the highest since November, with the assets now less than 25 tons shy of a record. Adding to the momentum, the Federal Reserve is gearing up for its first rate-setting meeting this year, where it’s expected to maintain easy monetary policy, and the World Gold Council will offer its assessment of global demand trends.

Gold jumped 1% on Monday to a near three-week high as growing concerns that the corona virus outbreak could impact the global economy pushed investors to safe havens.

Spot gold was up 0.8% at $1,582.41 per ounce during Mondays trading hours; having earlier touched it’s highest since Jan. 8.

The widely spreading corona virus has prompted the Chinese authorities to introduce travel restrictions across 10 cities, affecting up to 40 million people according to some reports, in the middle of the country’s most important holiday season, the Lunar New Year. Even Shanghai's Disneyland, one of the country’s most popular tourist destinations, has been shut.

Fears of a global contagion from the corona virus has plummeted stock markets worldwide. There’s nothing like a global contagion to get gold buyers to pile back into the safe haven. The yellow metal hit two-week highs on Friday, creeping toward the $1,580-per-ounce level targeted by gold bugs on worldwide fears over the economic fallout to the China-originated corona virus.

The death toll from the corona virus outbreak has risen to 81 in China, with 2,744 confirmed cases, and the virus has spread to more than 10 countries, including the U.S. and France.

Despite the strength of the greenback, the bullion price is taking advantage of this uncertain situation.

Markets are focused on news around the deadly corona virus. There will clearly be a significant economic impact, centered in China. A key question is the time it will take for the virus to be contained and one can only speculate at this stage.

Investors will be watching the U.S. Federal Reserve’s first policy meeting of this year on Jan. 28-29, where it is widely expected to keep rates unchanged.

In recent years, high interest rates, risk aversion stemming from the downturn in global trade, and support from earnings repatriation have supported the US dollar.

But over the coming years, US growth and interest rates will be closer to those elsewhere in the world, and uncertainty ahead of the US election and the waning effect of tariffs suggest a weaker greenback is likely.

The Fed at its monetary policy meeting on Wednesday use the same kind of cautious language heard by the ECB and BOC, then that could be the rocket fuel gold needs to sustain gains above $1600 per oz.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.