As part of the nation’s big push for transparency, the gold industry in India is feeling the tug of new financial regulations.
Concerns about gold smuggling in India and the black market have been extensively documented before, but the situation seems to have gotten to the point where the government feels the need to step in, create new monetary policies and enforcement schemes, and change the face of the gold industry in India forever. Let’s look at India and its changing relationship with gold – and what’s really driving the country’s new policies around the precious metal.
India has a problem. It is reported that only about 2% of its population pays income tax. In a nation of more than 1.3 billion people, that is a lot of lost revenue. The country’s newer policies around financial transparency and “above-board” business practices are noble and appropriate, but what they truly do is show that the pursuit of a bigger tax base is a major motivating piece.
The second concern that India has right now is a bit of a perception problem. Business practices in the nation tend to border on clandestine, unorthodox, or sometimes simply cash-based, and that has led to a bit of a haze around the notion of India as a trusted, global commercial partner. India is trying to do something about this, and promoting transparency in trade and commerce is a big focus for the current administration.
What do these two big campaigns have to do with India’s relationship with gold? Simply put, the new financial regulations put in place (or about to be put in place) are making it more difficult for smaller gold outfits to operate profitably. For starters, India has introduced a 3% GST tax (as of July 1st, 2017) that helps improve the traceability of transactions. The nation also created and implemented a new law that any purchase over $3,000 requires a tax ID number from the purchaser, creating even greater transparency in these kinds of transactions.
Nearly 75% of the $45-billion Indian gold market is traced back to small, family-owned and operated jewelry shops, and most business owners in this sector indicate that their purchases are done with cash and at arm’s length – meaning the new regulations might stifle their business to the point where it isn’t profitable any longer. Some of these changes have already begun to prompt weaker demand for gold in India, though the price is expected to rebound over the next few quarters.
India maintains the 10th largest gold reserves out of all nations across the globe, and they have been adding to their portfolio in a big way over recent months. This is a great indicator that even in a nation that is currently experience a bit of a demand issue with gold, they see real upside potential in the future. Buy low and sell high always works.