Constructive disruptions are
leading to sanity in gold market
Ahammed
MP, Chairman, Malabar Gold & Diamonds
It was rather
a wet Diwali for the gold jewelers during this
festive season. And the numbers just released by the World Gold Council
(WGC) are also not very exciting for the gold retailers in India. Does it mean gold is losing its glitter?
As someone
with decades of hands on experience in gold retailing, my answer is a
definitive no. It is true that the gold industry is facing a mild
disruption on account of many reasons, as listed by the WGC report. Demand
traditionally peaked during the festival and wedding seasons and in the past, a
major chunk of money for buying gifts came from untaxed wallets. But the cash
ban, GSTreforms and the zero-tolerance on the part of regulators have put
breaks on the spree.
Adding to
this is the Government’s move to discourage dealing in physical gold by hitting
the street with sovereign gold bonds in full force which are less risky but
highly liquid, safer, tax compliant and with assured returns. The shift to digital payment modes in a cash
dominated businesscame as another blow to gold retail trade.
But in the
hindsight, all these initiatives are aimed at bringing more sanity to the gold
market. Hence, we are now passing through a stage of `constructive
disruption’which is good for the sector. Greater transparency in gold business,
as the corollary to the uniform tax code, will move customers more towards
organized jewelry retailers, which again augers well for the industry. So, it
will take maximum a few quarters from now, to get settled and streamlined.An
array of factorswill work in favour of gold going forward and the precious metal
will have its hallmark moment.
The
year-on-year drop in global demand in gold was largely attributed to India, -
the second largest importer of yellow metal after China. Introduction of GST
was cited as the major trigger for this. While large, organized retailers, with
their sophisticated accounting and inventory-management and well-oiled supply
chain network, were well equipped to cope up with the transition to GST,the
smaller, unorganized retailers are facinghiccups. On top of it came the Know
Your Customer (KYC) norms to preclude tax dodging, leading to depression in
demand.
Perhaps, the
well-intentioned moves by the Government claimed a little more casualties than
expected. They are the micro, small and
medium enterprises (MSME) working as ancillary hubs to big players. These small players play a big role in job
creation in thousands and therefore are considered as growth engines of the
nation. Any disruption of this sector will have a cascading effect on the economy.
The
Government has realized it and initiated corrective actions to bring normalcy
back into the gold market. First, the Government has refined its gold
policy further to bring order to the industry by doing away with the KYC
guidelines up to gold purchase worth Rs 2 lakh. Then the authoritiestargeted unbridled imports of gold by
star trading houses who were reportedly selling tax free gold meant for value
addition and re-exports in the Domestic Tariff Area (DTA) at hefty discounts.
This move was prompted by reports that export houses were inflating the value
of gold exports (over-invoicing), without making any meaningful value
addition. The Director General of Foreign Trade (DGFT) recently
unambiguously barred these export houses from importing gold for domestic
consumption.
Once the dust
of the current disruption settles down, the gold market will see a major change
for the better. The level-playing filed will prompt more players from the
un-organized sector tomigrate to the organized sector.
In short, the
constructive corrective steps taken by the regulators to remove both the supply
and demand side bottlenecks for the gold business will bring the much awaited
hallmark moment for gold sooner than expected. Gold will shrug off these
passing disruptions and will find a new normal not very far from now.
Disclaimer:
Views are personal and not the views of the publisher.