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Below are Views On Budget by Mr. Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum Mutual Fund

Nirmala Sitharaman pleasantly surprised gold markets by announcing the reduction of custom duty on gold from 12.5% to 7.5%. With reduction on one hand, they increased the duty on the other by including a freshly introduced levy called the Agriculture Infrastructure and Development cess of 2.5%. The net effect will be lesser than the 5% reduction that the headline number suggests.

The immediate effect of this move will be that gold prices will decline to the extent of reduction of levies. All those holding gold will see the value erode to that extent whereas all those who want to buy more will get it relatively cheaper to that extent. Still, this is a welcome move and will be appreciated by the industry as it will reduce price distortions, bringing domestic gold prices closer to International prices to the extent of reduction in levy.

This will enable more efficient functioning of the gold markets in India and discourage illicit gold imports of the precious metal. Higher intervention through higher customs duty has all this while ensured that India could never be at the center of the global gold markets despite being the largest consumer and thus remain a price taker. Price distortions make it difficult to channelize the hoard of India’s gold savings into circulation and thereby integrate the gold market with other financial markets.

The finance minister termed this reduction as “rationalizing the gold duty” given prices have risen since the last increase. This rationalization has been long due given duties were as low as Rs. 100 per 10 grams during the previous BJP regime of 2001-04 when then Finance ministers Yashwant Sinha and Jaswant Singh had taken positive steps of duty reduction amidst an optimistic view of the development of the Gold sector.

We hope this duty reduction is aimed further at removing these price distortions in form of levies and truly think about developing the gold sector and bring India at the center of International gold markets. The Finance minister also set the ball rolling for the creation of the proposed spot gold exchange by announcing that the ministry will be notifying the Securities and Exchange Board of India (Sebi) as regulator for gold exchanges.

A gold exchange is the need of the hour as many of the key market players are currently under served by the current market structure and thereby stand at a disadvantage. Many of the important gold players demand a market infrastructure that helps bring transparency and standardization that a spot exchange could offer.

Today’s announcement brings us closer to realizing this objective as the appointment of a regulator will now move things forward on this front. The creation of a spot gold exchange will bring twin benefits for Gold ETFs by adding to the liquidity pool as well as leading to more efficient price discovery.

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