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.