Will This Diwali Bring More Glitter To The Gold Market?

Posted by Nitin Dagar in Business and Economy
October 16, 2017

As the season of celebration approaches, the market teems with a lot of activity and attractive offers. This is also the time for investments as Diwali is considered to be auspicious for financial and commercial dealings.

Since this is the first Diwali post demonetisation and the implementation of the Goods and Services Tax (GST), keeping in mind the subdued market conditions this year – many questions on the amount of sale have been raised.

The festive season is known for the purchase of gold, as people buy it for their good fortune. Thus, the demand for gold increases in the country during Diwali. Now, let us look at the gold market from this perspective.

“We expect the annual gold demand in India to remain in the 650-750 tonne range, with the first half at 300 tonnes,” said Somasundaram PR, managing director, India, World Gold Council. In 2016 the demand was 675.5 tonnes.

After GST, the tax on gold increased by 3% but this did not seem to create a negative effect on the demand. In the 22nd GST council meeting chaired by Finance Minister Arun Jaitley, the government decided not to make Aadhaar and PAN mandatory for purchase of jewellery above ₹50,000.

The relaxations may have a negative implication on the current account deficit (CAD). The demand of gold will result in higher imports, hence causing the risk of worsening an already high deficit. The initial restrictions on gold purchases were also imposed to curb black money, but the relaxations announced on Friday have also increased the risks for the same.

Gold imports have picked up by 69% to $1.9 billion in the month of August, and the export of gems and jewellery items contracted by 26% to $2.7 billion. The government forecast is to bring the CAD to 1.4% of the Gross Domestic Product (GDP) at the end of 2017, but with such high amount of imports, the CAD is already at an alarming 2.4%.

It would be interesting to see how the recent relaxations in gold purchases shape up for the Indian economy, especially when it needs to find some stability.