AFTER sharply declining sales in 2016, demand for gold has started rising in India once again, as consumers stock up the yellow metal for the busy wedding season over the coming months.

Last week, international consultancy Thomson Reuters GFMS noted that India’s gold imports in February soared by more than 80pc (as compared to February 2016) to 50 tonnes as consumers began buying jewellery for the wedding season.

Gold imports into India had been hit in 2016 for a variety of reasons including the government’s decision to scrap Rs500 and Rs1,000 notes, which accounted for more than 85pc of the value of the currency in circulation. The move was Prime Minister Narendra Modi’s crackdown on corruption and tax evasion.

India’s gold imports fell sharply by almost 45pc in 2016 to 510.4 tonnes, the lowest since 2003. According to the World Gold Council (WGC), India’s gold demand fell by more than 21pc in 2016 to 675.5 tonnes, a seven-year low. In terms of value, demand fell by 15pc to $27.2bn.

Jewellery demand also fell sharply by more than 22pc to 514 tonnes, whereas investment demand plunged by 17pc to 161.5 tonnes.

Tough action by the government including demonetisation has also seen a decline in the share of smuggled gold, which has fallen by 3pc to 17pc in 2016.

According to Somasundaram PR, managing director, WGC (India), demand fell as the industry confronted challenges relating to transitioning to a transparent system. “This was not unique to gold, but trade practices and embedded buying behaviour created short-term headwinds,” he says.

Somasundaram expects a demand of between 650-750 tonnes in 2017 thanks to the likely introduction of goods and services tax.

The gold trade has been facing a lot of challenges, especially with the government trying to introduce transparent policies in the industry. The government wants the trade to adopt more transparent practices, including getting the permanent account numbers (PAN) of buyers’ for income-tax purposes and imposing limits on cash transactions.

In last month’s union budget, finance minister Arun Jaitley imposed an upper limit of Rs300,000 for all cash transactions involving gold and other jewellery sales. Jewellers have to now charge 1pc tax at source for cash transactions of above Rs500,000 and all transactions above Rs200,000 would result in the consumer sharing her/his PAN cards.

The All India Gems and Jewellery Trade Federation believes that the government’s proposal of capping cash transactions to Rs300,000 would prove negative for the gems and jewellery sector. The move would hurt jewellery sales in rural areas, which constitute a significant chunk of gold and jewellery market in India.

Last year, the government had also tightened the ‘Know-your-customer’ rules by imposing a ceiling of Rs200,000 on all cash purchases of jewellery. According to Somasundaram, all these measures had affected gold demand last year.

The WGC believes that despite these tough challenges, the long-term prospect for gold demand in the country is good. But the government should lower the GST rate and import duty on the yellow metal to make it more attractive.

GOLD prices have also been fluctuating in India for quite some time especially after the demonetisation of Rs500 and Rs1,000 notes. It had dipped to Rs26,860 in December, the lowest in 2016.

But with demand picking up this year, gold prices have also started rising. According to gold traders, the government’s decision to increase the cash withdrawal limit from Rs24,000 to Rs50,000 last month has boosted demand for the yellow metal.

Gold and jewellery traders across Indian cities have been reporting a surge in demand following this relaxation. Surendra Mehta, national secretary, India Bullion and Jewellers Association, notes that when gold prices rise, consumers rush to buy the metal in anticipation of a further increase.

Gold prices have gone up by nearly 10pc in 2017 and are poised to head northwards, even as the international price could cross the $1,300-mark (per troy ounce). Internationally, gold prices breached the high mark touched in November — $1,256 an ounce — and sped rapidly to the $1,300 level.

Last week, gold prices in India once again breached the Rs30,000- mark — the first time since October — trading at Rs30,175 for 10gm in the bullion market. Silver prices too have been rising, crossing the Rs44,000-mark.

Demand for the yellow metal in rural India has also been rising steadily since January. The demonetisation last November had hurt rural India badly, resulting in a cash crunch in many places.

However, despite the likelihood of rising demand in India, the gold jewellery export sector has suffered a major setback of late, with the United Arab Emirates (UAE) imposing a 5pc import duty on the jewellery products.

According to the Gems and Jewellery Export Promotion Council (GJEPC), India’s gold jewellery exports to the UAE fell sharply to $148.1m in January 2017, from $334.08m in January 2016.

The UAE, especially Dubai, is a major export market for Indian jewellery exports. Praveen Shankar Pandya, chairman, GJEPC, notes that Indian gold jewellery exports to the country declined after the Indian government imposed a 15pc export duty on products sent to the UAE.

This saw many Indian firms involved in blending ornaments shifting their base to the UAE. But the recent decision by the UAE to levy a 5pc import duty has hurt the business badly.

The UAE government’s decision has hit India’s gold jewellery exports, which fell by 25pc to $400m in January. Gold exports to Dubai, one of the most significant markets for Indian exporters, came to a standstill following the imposition of the duty.

Analysts expect Indian exporters to be hit hard by the UAE government’s decision and do not expect any major revival in sales over the next few months.

Published in Dawn, Business & Finance weekly, March 6th, 2017