Interview/ Somasundaram P.R., regional CEO, India, World Gold Council
The Indian gold market is one of the world’s largest and most diverse. But according to Somasundaram P.R., regional CEO, India, World Gold Council, high taxes in India―particularly at a time when gold prices have seen historic highs―makes smuggling lucrative. “I believe that high import duty is counterproductive to the steps being taken to make the gold market in India more transparent,” he says.
Excerpts from an interview:
Q/ India is the second largest consumer of gold jewellery. What reforms are needed in the market?
A/ India’s gold market is now ready for the next stage of evolution. Time is right for the Indian gold industry to have its own self-regulatory organisation that allows members to demonstrate credentials, attract customers, grow businesses, and drive trust across the market. The organisation will build on the work of the Swarna Adarsh Abhiyaan initiative―devising a code of conduct for every industry vertical, providing certification for members who adopt these codes, engaging with stakeholders across the value chain, and advocating for best practice. The organisation would serve as the conscience keeper of the industry. The first steps have already been taken and further consultations are under way with multiple stakeholders.
Q/ There is focus on smuggling. How big is the concern of grey markets?
A/ With GST of 3 per cent, the total taxes on gold is more than 18.45 per cent. These high taxes, particularly at a time when prices have seen historic highs, increase the propensity to smuggle gold even among ordinary people, not to speak of organised networks. The grey market has diluted efforts to reduce cash transactions in the economy, and penalises organised and compliant players. I believe that high import duty is counterproductive to the steps being taken to make the gold market in India more transparent.
Q/ There is a long-pending demand of the gold industry to reduce customs duty to curb smuggling of gold. Are the concerns adequately addressed?
A/ The answer is no. But to lay the blame entirely on high duty, distanced from trade acquiescence, would not be correct. The argument has always been that these are fringe players, but then the question remains if the industry has done enough to self-regulate and weed out such fringe players. Are practices strong enough to eliminate illicitly sourced gold?
Duty hike in my view was necessitated to curb demand at a time when global developments like war and oil prices threatened to scuttle growth. It is no longer the case, so a reduction should be considered. But then again, a reduction without some commitment from the industry on transparent trade practices for a structural solution to this problem gives no leverage to policymakers or the compliant lot who suffer the consequences of illicit trade.
Q/ How do volatile gold prices in India impact the industry and fuel smuggling?
A/ Smuggling thrives only when demand is strong. Our studies show that, for each 1 per cent increase in the rupee-based price of gold, demand falls 0.4 per cent. While steady gold price movements affect long-term demand, sharp price changes have an impact on short-term demand. For each 1 per cent fall in gold price in any given year, demand increases by 1.2 per cent.
Higher prices and higher taxes on gold also make smuggling attractive, as incentives are higher. Given India’s strong economic growth and low per capita [consumption] of gold, the demand is going to be strong. Unless checked, a cash market coupled with high duties is going to sustain grey market.