Interim Budget 2014: Disappoints the Gems and Jewellery Sector

parliamenticFinance Minister P Chidambaram presented an interim budget on February 17, ahead of the general elections scheduled for later this year. Despite of announcing a cut in indirect taxes and staying well within the fiscal deficit number he had projected, the interim budget was a big disappointment for the gems and jewellery sector. The Interim Budget 2014-15 completely sidelined the sector that has been going through downfall due to strict import norms imposed by the Government in 2013.  The sector expected the import duty on gold imports to be slashed from 10% to 8% in the interim budget.

India had imposed the curbs last year when overseas gold purchases – the country’s second most expensive import after oil – pushed its current account deficit to a record and undermined the rupee currency. With three duty hikes last year to a record 10%, the gold imports fell to 19.3 tonnes in November from a high of 162 tonnes in May.

Due to import restrictions, jewellers across the nation are facing severe inventory crunch due to hike in import duty. In September, the Indian government increased import duty on gold and silver jewellery to 15 per cent from 10 per cent, in a bid to protect the domestic industry. Indians are smuggling in more bullion than ever as buyers seek alternative sources of the metal, which is often given as gifts at weddings and festivals in the country. The supply crunch helped drive Indian gold premiums to a record high of $160 an ounce over London prices in early December, versus about $1.30 to $1.50 an ounce in Singapore.

Taking an account of the issues that have aroused due to stringent norms, some Government officials were in discussions of to cut a record high import duty on gold and relax rules on exports, government sources said, after the measures helped narrow the country’s trade deficit and now threaten to encourage smuggling. Jewellers, who estimate India’s monthly demand to be nearer 60 tonnes, have been asking for a duty cut to 8 per cent.

Jewellery stocks dip as interim budget sidelines sector

Shares of jewellery companies tanked as much as 11% erasing the entire morning gains as interim budget was announced by P. Chidambaram on February 17. The interim budget failed to give any sops to the sector.

P C Jeweller, Titan Company, Gitanjali Gems, Tribhovandas Bhimji Zaveri (TBZ), Thangamayil Jewellery, Renaissance Jewellery and Shree Ganesh Jewellery House were trading down between 1-11% on the Bombay Stock Exchange (BSE).

Most of these stocks were trading in green earlier on the same day as the jewellers expected relaxations of the gold import norms, including 80:20 rule. Last month, United Progressive Alliance (UPA) Chairperson Sonia Gandhi had written a letter to the government seeking such a move.

FM supports commodity markets’ reforms, but doesn’t guarantee relaxing gold import norms

P Chidambaram while presenting the budget on February 17 supported reforms in commodities market. He claimed credit for fully deregulating the sugar sector. He further declared service tax exemption to rice storage, etc but relaxation of gold import duty looked very far off decision under the budget. He said that the Government may look at relaxing restrictions on gold import but asserted that a developing country like India cannot afford to import gold worth $50-60 billion a year as it leads to foreign exchange outgo.

“There are pros and cons to relaxing restrictions. We will weigh them carefully and take a decision….We have to keep in mind the goal is to contain the CAD at a level where it can be safely and fully financed,” he said after presenting interim budget. He however, said
he cannot make any announcements because the Parliament is in session. High gold import was one of the major reasons for India’s record current account deficit (CAD) of $88 billion during the last fiscal. In the first two months of the current fiscal, the imports had crossed 300 tonnes.

Chidambaram said the curbs on gold import were “absolutely necessary” for India’s economic health and the restrictions have helped. Gold imports fell to just 21 tonnes in November against a record 162 tonnes in May 2013. This fiscal, the CAD has been contained at $45 billion, and the finance minister indicated that it may further fall.

Market Expectations

Market had expected gold import duty to be eased by 2% from the current 10% in view of success attained in containing current account deficit (CAD). However, Chidambaram decided to maintain status quo stating that India still needs to have curbs in place to keep gold imports in check.

The World Gold Council (WGC)’s India Managing Director Somasundaram P. R. was recently quoted as saying the latter half of 2013 had seen “intense grey market” activity, but its impact would be more visible and significant in 2014 if the import curbs continue.

In the interim budget presented on February 17, many had expected Chidambaram to announce some relief, but it was not to be. An interim budget became necessary since the five-year term of the present government is almost over, and elections are just a few months away. The new government is expected to present a full-fledged budget in June or July.

Total jewellery demand in India in 2013 was up by 11 percent at 612.7 tons, compared to 552 tons in 2012. Reflecting on the 2014 situation, the WGC has said the year would be “a comeback for the precious metal.” In 2014, market estimation of gold demand stands between 900-1,000 tons.

Exporters were expecting an expansion of the Government’s interest subsidy programme to the Gems and Jewellery Sector, industry executive had said. The commerce department has an unspent amount of Rs 300-400 crore for the financial year through March, which it can use to give an immediate fiscal incentive, they said. The prospects of such a step have increased with commerce minister Anand Sharma last month telling his officials to find ways to boost outbound shipments in the last quarter to meet the $325-billion export target for this fiscal year.

“We were looking forward to some relaxation on the 80:20 rule, which we were promised was in the works by government officials. We have been told that there would be a partial relaxation on the restrictions to import gold and in a manner that would cut down on the surge in smuggling. These new norms are more stifling,” said Bachubhai Zaveri, bullion trader at Mumbai’s Zaveri Bazaar.

He added over the past three weeks, jewellery traders and exporters have seen a fall in the supply of gold, which had led to massive shortfalls in the gold jewellery fabrication segment. The fall, he said, resulted from a delay by the Directorate General of Foreign Trade in clearing gold procurement requests. Moreover, nominated agencies have also reportedly deferred supply to bulk consumers amidst expectations of a rationalisation in the gold import duty.

With elections around the corner, exporters aren’t expecting much from the vote on account, or interim budget. “It will be difficult to incorporate marketing assistance in the interim budget. However, we feel that interest subsidy can be easily extended to more sectors as the commerce department already has Rs300-400 crore surplus to accommodate these sectors,” said Ajay Sahai, director-general of the Federation of Indian Export Organisations.

The government could announce an expansion in the subsidy programme outside the vote on account too. Last year, export sops were announced in April, and not in the budget. The gems and jewellery sector has played a major role in pulling overall export growth lower. The sector posted a more than 11% fall in December exports at Rs15,735 crore, hurt by government and central bank steps to curb gold imports to help reduce current account deficit.

The Gems & Jewellery Export Promotion Council has asked the finance minister to relax the 80:20 rule. Under this rule, importers have to ensure that 20% of the gold they imported is compulsorily shipped out after adding value, such as by making jewellery with the metal. “Apart from the extension of the 3% interest subvention scheme, we are hopeful that the finance minister will relax the 80:20 scheme,” said Vipul Shah, Chairman of the council.

Gems and Jewellery associations express deep disappointment over gold duty status

According to PTI, the All India Gems and Jewellery Trade Federation (GJF) were very disappointed and shock at the Interim Budget presented by FM in February. Though, he urged the Government to bring down the import duties on gold to curb smuggling, he didn’t mention any signs of curbing the imports in the interim budget.

Mr. Haresh Soni, Chairman, GJF said, “It is anti-people budget impacting over three crores people as the Finance Minister ignores the plight of jewellery artisans and craftsmen.”

“The entire Gems & Jewellery Industry is deeply disappointed and shocked at the insensitive treatment meted out to it by the Government. The Government seems to be inconsiderate to the plight of lakhs of families of goldsmiths and craftsmen, who are suffering due to lack of job work and thereby threatening their livelihood. The Government is also turning a blind eye to the increasing instances of gold smuggling that is not only creating a parallel economy but also threatening the security of the country due to rise in anti-social activities,” Soni added.

The suggestions by various trade bodies to withdraw the 80:20 norm and duty cut up to 2% to control CAD were rejected by the Government.  Hence, all the bodies have reiterated that the Government’s recent policies such as 80:20 scheme has resulted in high premium and monopolized business environment, destroying the organized G&J industry as well as lead to unemployment and starvation amongst the workforce.

These associations strongly felt that the gems and jewellery industry is being discriminated again because excise duty relief has been granted to luxury items such as large/ mid-sized cars & SUVs under the pretext that the automobile industry is registering negative growth but the same was not extended to the G&J industry.

The domestic gems and jewellery industry at present employs 40 lakh people and had a market size of Rs 251,000 crore in 2013, with a potential to Rs. 500,000-530,000 crore by 2018 (FICCI-AT Kearney Report 2013). But its growth has been curbed after the ‘Gold Control Raj’ was imposed in the country in August 2013 and after the Government sought to restrict gold imports under 80:20 scheme.

They reiterate that gold alone cannot be considered as the only factor responsible for the growing current account deficit, GJF said that the Government should recognize people’s sentiments to consider gold jewellery as the best social security and also preserve the centuries old jewellery design legacy of India. If India’s artisans, craftsmen and goldsmiths don’t survive, then the country’s centuries old heritage of jewellery making will die a natural death and will be lost forever!

Many jewellers also expressed disappointment that while the Union Finance Minister spoke about the fall in manufacturing investment worrying and attracting capital investment, the manufacturing facilities in the G&J industry were lying unutilized due to Government policies. The Indian G&J sector has not attracted any national or international investment in jewellery manufacturing and the technology has not been upgraded to keep pace with global tools & techniques.

The possibility of market reforms is low

On one hand, the Government was encouraging the National Skills Development programme and sector mentor counsel by labour employment department, but on the other hand, its policies resulted in driving lakhs of jobless artisans and craftsmen towards suicide. The Government was promoting entrepreneurship but discouraging it in the G&J sector, as per the GJF. The Government seems to be controlling fiscal deficit at the cost of sacrificing the indigenous G&J industry.

In its on-going attempt to ease the import duty norms on gold to eventually increase the finished jewellery exports, the possibility of duty reduction was still there until the last session of the parliament. In the board meeting of the India Bullion and Jewellers Association, President Mohit Kamboj said, “We had been waiting for the last session of parliament where we expected the Government to give us some relief. However, nothing seems to happen.” The import duty on import of gold bullion has been increased from Rs.300/- per 10gms to 10% in stages.

He further said that if the import duty is rolled back then the menace of gold through smuggling route will not be any more productive and hence the leakage will be prevented. More so, the smuggling of gold is dangerous to the overall export business and reputation of the Indian sector as per Responsible Gold and Dodd Frank Act. If the import duty is so reduced then it will also reduce the transaction cost of exports in as much as the exporter will not be required to block his fund of as high as 10% till the inward remittance does not come.

Government now should roll back the restricted policy as the CAD has reduced substantially. Such policy reversal would also curve the growing black marketing activities in the trade.