Finance Minister P. Chidambaram and his fellow wonks will be all smiles
with plunging gold imports in the country, but the shortage of bullion
ahead of the festival and wedding season could be a boomerang they had
not accounted for.
Gold imports were just about 3.5 tonnes
in August - about a tenth from year-ago period. This is against an
average 40 tonnes of gold a month that the domestic jewellery business
consumes, says C. Vinod Hayagriv, managing director at one of India's
oldest jewelers, C. Krishniah Chetty & Sons in Bangalore.
Leading jewellery retailers are worried.
"There
is a short supply of gold in the market, and we are managing
hand-to-mouth," says Bhaskar Bhat, Managing Director at Titan Co. Ltd,
which owns the Tanishq jewellery chain of more than 150 stores. "We are
somehow managing, but I can say we have less of a problem compared to
many others in the market."
"I think we are going to see a big
shortage in about a fortnight's time as we get close to the festival
season," says Harmesh Arora, spokesman at Bombay Bullion Association
Ltd.
Festival season sales in India start typically around
end-September just before the Durga Puja celebrations - beginning
October 9 this year - and go on until after Diwali, falling on November 3
this year. Wedding season runs between October and early January.
What
caused the sharp decline were a series of measures by the finance
ministry and the Reserve Bank of India (RBI) to rein in gold imports,
the second highest imported item in 2012-13 after crude oil and
petroleum products. One rule change had a condition imposed on
jewellers or banks that they would have to export a fifth of their gold
imports. The resultant confusion and absence of any clarification from
the government side led to a sharp decline in imports.
In routine
course, jewellers buy bullion from banks, which import and sell, but
the export rule has crimped the supply from banks. "We are not able to
import because we cannot pay upfront for gold, and take the exposure [to
the dollar on exports]," says P.G. Jayakumar, CEO at Dhanlaxmi Bank.
Gold
coin sales have almost come to an end after All India Gems &
Jewellery Trade Federation, a grouping of jewellers, recently advised
its members to suspend their sale.
"We are gradually closing
down our gold coin business because we are not able to import gold,"
says P.E. Mathai, CEO at Muthoot Precious Metals Corporation, citing the
new regulations. "There is a shortage of gold in the market for those
who follow ethical business practices."
Bullion Association's
Arora says what has met part of the demand is people who bought gold at
lower rates before selling back to jewellers taking advantage of the
price rally. Twenty-four-karat gold is trading above Rs 31,000 for 10
grams. Part of the gold from Indian households is getting recycled
easing the supply to some extent, but traders say this will taper after
some time.
Jewellers, off the record, say bullion is available in
the grey market at prices lower by Rs 250-300 per gram as they have
been smuggled in but that is not an option for the large jewellers who
source their gold only through legal channels.
According to data
from industry body World Gold Council, which tracks gold imports by the
calendar year, India imported 859.7 tonnes of gold in 2012. To be sure,
gold imports in the past have been higher at 958.2 tonnes in 2010 and
969 tonnes in 2011. But what hurt the Indian economy in 2012 and first
two quarters of calendar year 2013 was the double whammy of rising gold
prices and an appreciating dollar.
India's current account
deficit (CAD), or the difference in imports and exports net of
remittances and transfers, stood at nearly $88 billion in 2012-13, or
4.8 per cent of gross domestic product, primarily because of surging
gold imports by value. The government target for CAD, $78.2 billion in
2011-12, in 2013-14 is $70 billion.
Going by import numbers of
August and September, the government may be on target to reduce gold
imports, even if there isn't supporting evidence of demand tapering on
the ground. In January-June of 2013, gold imports were 553.1 tonnes -
averaging over 92 tonnes a month. In July and August, it fell sharply to
an average of 23.75 tonnes a month. The trend of lower imports in
August is expected to continue in September also, according to gold
industry sources. They expect the government to ease rules in October if
the CAD improves a little bit.
The World Gold Council predicts
some stability in the days to come. "We hope to see the situation to
ease during the festival season with the government issuing the
necessary clarifications on gold imports," says P.R. Somasundaram its
managing director, India.
