Rajan Venkatesh, Managing Director of ScotiaMocatta, the bullion division of Bank of Nova Scotia — the country’s largest gold importing bank, said in India, gold consumers don’t look at the duty or the VAT element when buying gold. They buy it if they are convinced that the metal’s price can still go up, he said in an interview to Business Line . Excerpts.
As the country’s biggest gold importing agency, can you tell us what the situation is after the RBI imposed a 20 per cent export obligation on all imports? Is there no gold coming into the country?
Imports are definitely happening. What has happened is that there was a circular initially issued by the Reserve Bank of India. Subsequently there was another circular from it.
Then a customs notification came in. So there was a fair amount of uncertainty and lack of clarity, because of which the imports stopped. Banks themselves were reluctant to import until they had clarity and until the customs officials were clear in their mind about what the rules were and how they were going to clear consignments. After the recent clarification from the authorities, I understand that there have been consignments in Hyderabad, Coimbatore, Kolkata and Mumbai which are getting cleared.
But, even in its recent clarification, the RBI held that 20 per cent of imports have to be exported. So what is the change? Do you think importers will be able to manage the 20 per cent export obligation?
Yes, there is absolutely no change to that. The order requiring 20 per cent exports was based on the country’s exports for the last three years.
It was not a figure that came out of thin air. Of the total 900-odd tonnes India was importing, about 60-70 tonnes of gold were used for manufacturing jewellery which was being exported, so that’s why they came up with the 20:80 scheme. Logically, the reason why they did that was they wanted to make sure that at least a portion of whatever imports are coming into the country is supplied to the exporters and that will bring foreign exchange back into the country. So, that 20 per cent is easily achievable.
Do you think the demand for gold can be brought down in India by increasing import duty? Has there been any evidence of this in the past?
Since liberalisation of the ’90s, the country has not seen any instance of a sharp hike in import duty on gold. In the early ’90s, maybe from 1 per cent the duty was increased to 2 per cent but then it was never with the intention to reduce consumption.
But, this time it is because the current account deficit has widened significantly, the Government wanted to reduce gold consumption and increased the duty manifold. But, if you ask me if increasing the duty will help curtail consumption, I will say that price plays only a small part in the decision-making process.
The Indian consumer doesn’t split the price of gold into various components and see what is the international price of gold, what is the duty, what is the VAT element, etc. For him if price comes down to, say Rs 2,800 per gram from Rs 3,000 he will go ahead and buy it if he thinks it is a good price to buy and he sees a good possibility of the price going up from there.
Gold ETFs are seeing outflows. Is this gold coming into circulation? If this is being consumed as jewellery, that doesn’t meet the government’s purpose of unlocking gold held by households, right?
Gold from ETFs is coming into the market. When gold units get redeemed there the gold flows into the domestic market. It is acceptable if this is going to the jewellery sector. All that the government is trying to say is please we need to make sure that our imports are curtailed to the extent of our exports.
What is the current account deficit? It means that you are spending more than what you are earning, your outflow in dollars is much higher than your inflow in dollars. So, they are saying you make sure you mobilise gold locally and then you use it for jewellery manufacturing or anything. The government absolutely has no problems with that.
Due to these restrictions, domestic price of gold has gone up. Do you think this is what has hurt investor sentiment?
Ten per cent is quite a high level of duty. Consider the international price of gold.
Assuming that it is hovering at $1,400 right now, a 10 per cent duty means $140 per ounce is added due to duty. But, I don’t think investors look at this in an isolated manner because if they think the price of gold is likely to go up further, then they will continue to buy it. It is the return that matters for the investor.