Domestic gold prices dropped by nearly five per cent on Tuesday after Finance Minister Nirmala Sitharaman announced a cut in the basic customs duty on gold, silver and platinum.

he reduction in customs duty on gold and other precious metals is expected to bring down the smuggling of the yellow metal and provide much needed relief to the industry.

In view of the duty cut, prices of 22-carat gold - used for jewellery - dropped to ₹6,793 per gram on Tuesday from ₹7,146 on Monday.

While providing consumer relief from soaring gold prices - which have gained over 15 per cent since the beginning of 2024 - it will also check smuggling which has been rampant particularly in South India. Over the last few weeks, even Customs authorities have been found hand-in-glove with gold smugglers, while the precious metal is finding its way into the country through many ways.

The propensity to smuggle gold into the country was high after the government hiked import duty on gold to 15 per cent. With the high gold prices, the bullion industry estimates that 150-200 tonnes of gold is being smuggled annually into India. This was depriving the Government of revenue due to it.

The discount on the domestic gold price to international price, which stayed range bound between $1-$12 an ounce during mid-April to the end of June, has widened sharply to $50 an ounce as unofficial gold flooded the market when the gold jewellery demand plateaued after the recent sharp rally in gold price.

Cuts sops for smugglers

Gold prices are expected to come down by ₹5,900 per 10 gram while that of silver will fall by ₹7,600 per kg. However, the industry was disappointed as the Finance Minister did not consider the demand to reduce import duty on dore (raw form of gold).

Sachin Jain, Regional CEO, India, World Gold Council said the Budget has reduced the overall taxes on gold from about 18.5 per cent (including GST) to 9 per cent. “It will reduce the incentives for smuggling of gold and create a level playing field for honest industry stakeholders. Gold prices will also correct locally and give a boost to retail gold demand,” he said.

Fillip to demand

Colin Shah, MD, Kama Jewelry, said the cut in duty will play a major role in bringing down the cases of smuggling and provide cost benefits to the consumers in the country, which will provide a major fillip to the demand in the domestic market. Acceptance of Safe Harbour Rule for the sale of rough diamonds in Special Notified Zones will help in brining transparency in trade activities in the SNZs, he said.

Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities said gold prices on MCX was down by over ₹2,000 to ₹70,350, and silver slipped by ₹2,500 to ₹86,600 as the market priced in the impact of lower import duty gap.

Sumit Dassani, Partner at Dassani Brothers, said the pivotal move will make precious metals more accessible and drive demand.

Lower costs will enhance the ability to provide competitive pricing while continuing to deliver intricate and magnificent adornments that celebrate life’s key moments, he said.

Amit Pratihari, MD, De Beers Forevermark said the implementation of safe harbour rates for the diamond-cutting industry, for foreign mining companies selling rough diamonds in India, will stimulate growth, boost consumer spending and increase global competitiveness.

Vikas Singh, Managing Director and CEO, MMTC-Pamp, said the duty cut in gold was a welcome move which will drive down retail prices of the precious metal besides styming the grey market.

“This in turn is expected to set off a virtuous cycle of increased consumption and contribute substantially to the exchequer and facilitate the growth of the as a precious metal hub,” he said.

Kinjal Shah, Senior Vice President and Co-Group Head - Corporate Ratings, ICRA Ltd, said gold prices, which rose by 40 per cent in the last three years, will soften with the reduction in BCD to 5 per cent from the current 11 per cent and AIDC to 1 per cent from 5 per cent, thus supporting overall demand for physical gold and jewellery.

However, certain players in the industry, especially the ones who do not hedge the gold prices, could face some inventory losses in the near term. Rationalisation of duties will help accelerate formalisation of the gold jewellery industry, enabling meaningful conversion of unorganised to organised trade. Safe harbour rates will encourage foreign mining companies to sell rough diamonds directly in India, as against current imports, thus facilitating timely and cost-effective procurement by Indian diamantaires.

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