From November 2016, the Indian Gold Market is affected by two major economic changes in the country – Demonetisation of Rs.500 and Rs.1,000 currency notes and the implementation of the Goods and Service Tax (GST).
Let us go through the scenario in the gold market before demonetization.
The gold merchants, before the awareness of demonetization, predicted a rise in the sale of gold in the Q3 of 2016. This is because of the festival of Diwali and the marriage season. Their prediction was expected to be accurate because Diwali and a marriage both cannot be celebrated without the purchase of gold in India.
However, on the day people came to know that demonetization was to be announced (i.e. 8th November 2016), from 8 pm onwards, all the households started rushing to the nearest jewelry shops to purchase gold from the Rs.500 and Rs.1,000 currency notes. The jeweler shops were open till 11:30 that day. The sales and the prices rose tremendously for a few hours.
The next day the sales fell tremendously as people did not have enough cash to buy gold. The festive offers helped only a little to boost the sales but they were still very low. At least till December 2016, the only people who bought gold were the ones who had marriage ceremonies (as buying gold is an integral part of any Indian marriage) and the NRIs as they were not affected by demonetization. All the translations made by NRIs were online and so all the money received was official. This is the reason why many jewelers targeted their NRI customers at that time.
In 2017, as the new currency notes were circulated and started reaching to more and more people, the gold market started gaining gradually to cover the losses of demonetization.
However, this is not the end. When the market almost recovered, the government passed the GST bill (a new tax system) in India. Fortunately, it proved to be a boon for the gold merchants.
Now, let us understand the impact of GST on the Indian Gold Market with the help of a hypothetical example.
|PRICE OF GOLD BEFORE TAX
|CUSTOM DUTY @ 10%
|EXCISE DUTY @ 1%
|VAT @ 1.2%
|GST @ 3%
|MAKING CHARGES (12% of gold price + customs)
|MAKING CHARGES GST @ 18%
|FINAL GOLD PRICE
|TOTAL TAX PAID
From the above example, we observe that the Customs Duty is unchanged while GST has subsumed VAT and Excise Duty. GST is also levied on Making Charges. Overall, it is observed that there is an effective hike of 3.24% in the gold prices.
The following chart shows the changes in the gold prices from November 2016 till August 2017.
In the above chart, we see a tremendous hike in price in November 2016. This is an effect of demonetization. The effect of the same was also seen in January 2017 when the prices hit the all-time low for the year. We also observe that after GST was imposed on 1st July 2017, the gold market is gaining.
The following graph shows the changes in gold prices (24 karats) from 1st September 2017 to 19th September 2017.
In the above graph the price may seem to be falling but here it is to be noted that in the bigger picture the price has not fallen drastically. It is from Rs.31,700 to Rs.32,700 which is a good indication.
By Ria Vaghela (Market Analyst Intern at Qrius and FYBMS student at Narsee Monjee College of Commerce and Economics)