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World Gold Council and RBC fear impact of GST on short term Indian gold demand

The World Gold Council fear that India's Goods and Services Tax could pile further pressure on short term demand in India. Their concerns are shared by RBC, who additionally report that the longer term outlook for the world’s No.2 consumer of the yellow metal remains uncertain.

The implementation of India's GST (3% on Gold) on July 1st 2017 saw an initial significant increase in short term demand (Q1 demand was 124 tons) due to seasonal purchases being brought forward prior to the tax increases. It is expected, however, that this will lead to underwhelming levels of demand during the traditionally busy months between September and November. Indeed, RBC stipulates that implementation of the GST will lead to India's gold purchasing becoming front-loaded in 2017, as higher than normal initial imports eat into the long term demand.

Early indications suggest that the country will see a “normal or above-normal monsoon season and thus a bumper crop year”. This is a positive factor for short-term demand in India and would suggest that demand will be strong relative to 2016. Indeed, RBC predict “demand (and imports) to improve over the longer term versus 2016, which was weak, but not necessarily beyond long-term averages. There is scope for further optimism, RBC speculate that GST could spark “efficiency and transparency gains, incentivizing more integrated and organized participants”.

As a consequence of the increase in tax from 1.2% to 3%, the World Gold Council have expressed fears that illegal importation and trading of Gold will become a more appealing proposition. Furthermore RBC report that the limit on cash transaction sizes may “curb some gold purchases, limit purchase sizes, or cause a push to the grey market”. There is a fear that, should there be an increase in grey market activity, Modi’s government may look to impose a number of gold-negative policies designed to limit consumption. However, RBC also pen that new hallmarking standards, coupled with the further organisation and transparency of GST will likely make grey market trading more difficult.

Overall, RBC anticipate “total demand to improve in the longer term, with imports around 700-800 tons, which is an increase year on year when compared to 2016”. It is, however, still short of the levels seen in 2014/2015 (850 tons). Moreover, RBC understands that “long term demand depends more and more on India's economic growth” (in particular income growth), meaning that GST will play an important role.

RBC predict that “while India will remain one of the dominant forces in the gold market (due to its long-running cultural affinity for gold), it is still expected that China will be the main driver”. This is due primarily to “the continued efforts from the Indian Government to mobilise domestic stocks (thousands of tons)”. China on the other hand “seems more interesting in absorbing gold into the domestic market”.

01 Aug 2017

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