Bring the shine back on
Boby Chemmanur

There has been an overall despondency across the gold value chain ever since the finance minister tabled the Union budget for 2018-19 in Parliament on February 1.  This ‘let down’ feeling sweeping across the gold industry is a shared concern cutting across the entire gold value chain —from artisans to small production units to trade and the industry as a whole.  Considering the immense potential of the industry in creating new jobs and adding to the upside in exports, this shared concern is justifiable in a sense as the government chose to defer considering the long list of long pending demands by the organised gold industry — the most important being the imperative to slash the peak import duty on the yellow metal from the current level of 10 per cent to at least 5 per cent. Ornament makers have also raised an alarm over a slump in demand for gold jewellery in the peripheral markets mainly due to shrinking farm income despite the back-to-back above normal monsoon.  In short, there was no showstopper for the gold trade in the Union Budget as widely expected.

But a close reading of the budget documents along with the Economic Survey brings out a few counter points.  I would prefer to buy the argument that though the finance minister stop short of handing out any budget gifts, there is enough and more for the gold industry to cheer in the long run. And once these policy proposals start playing out in full, the gold sector will have it Goldilocks moment, albeit delayed.

First, Arvind Subramanian, the Chief Economic Adviser to the finance Ministry, dropped enough hints during the run up to the budget that the time has finally come for policy makers to treat gold as a separate asset class. In his view, the government should be consistent in treating different asset classes differently, and this should be done on an incremental manner. The eight-member task force set up by the government under Arbind Modi to redraft the direct tax code is mandated to look into this issue as well.

This view has found its echo in the budget with FM?proposing a comprehensive gold policy on the anvil to develop yellow metal as an asset class in its own right, though he did not go into any details. This will make a course correction in investors’ behaviour in parking funds in gold. This step, once finalised, will differentiate between different asset classes such as real estate, stocks, bonds and gold.  This will give gold the status of legal tender. Let us hope that the gold will get the status of hard currency which can be exchanged at any point of time, anywhere.

The economic logic behind this move to treat different asset classes on different footing is borne out of the fact that a massive correction in the stock market will have a cascading effect on the markets of other asset classes. The imperative to build firewalls among different markets has been made clear to the world by the financial contagion that swept across South East Asian nations which were once billed as roaring tigers but turned into mute cats post event. In short, the idea is to stop the pain in one market spilling over to other markets.

Another budget proposal is the government’s decision to keep gold out of the ambit of newly imposed social welfare surcharge.  This move has spared the gold industry from bearing the additional burden of 7 per cent levy over and above the prevailing customs and import duties.

Finally, the FM’s proposal to revamp the gold monetisation scheme will let people open gold deposit accounts in a hassle-free manner.  This will add to the gold industry’s business albeit in a granular way by unlocking approximately 22,000 tonnes of gold lying idle in Indian households.  Together, these moves will also help develop consumer friendly gold exchanges.

Therefore, the proposed gold policy on the anvil should take into account the interest of all stake holders across the gold value chain. It should address, among others, important issues such as higher import duty on the yellow metal, making easy finance available to small-scale gold manufacturing units to revive investment cycle and catalysing job creation as well as the important role the sector plays in enhancing exports of value added products leading to more foreign exchange inflows.

The last point becomes all the more important as the country’s external balance sheet has been under increased stress due to slowdown in overall exports with a depreciating rupee swelling the import bill leading to a widening current account deficit (CAD). Hence, I am of the view that the government should take into account all these genuine factors before unveiling the extra budgetary policies for the gold industry to get its glitter back.

(The writer is chairman & MD of Chemmanur International Jewellers Group)