After the Union Budget 2024 proposed a cut in gold customs duty, prices of gold fell by over five per cent to wipe off Rs 10.7 lakh crore in value in a single day. It was the sixth-largest wealth erosion recorded so far in comparison to the equity markets.
The destruction of wealth is expected to hit far more households than the movement in the equities market in the wake of Finance Minister Nirmala Sitharaman's budget speech.
Indian households own approximately a combined 11 per cent of the entire world's gold. This is more than reserves of many developed economies like the United States, Germany, Switzerland and the International Monetary Fund (IMF) combined.
Gold prices have been on a rebellious rise since the start of the year, jumping 14.7 per cent and outperforming the Sensex, which rose by around 11 per cent during the same period. MCX gold has dropped by nearly 5.2 per cent so far in July.
During the Budget, however, Sitharaman announced a cut on Basic Customs Duty on gold and silver from 10 per cent to six per cent and Agriculture Infrastructure and Development Cess (AIDC) from five per cent to one per cent. This reduced the overall taxes on gold from close to 18.5 per cent (including GST) to nine per cent.
Gold traders were displeased with the announcement and began selling off holdings to book profits. Gold financiers were also not happy with the move as it brought down the value of gold which will significantly pull down their loan-to-value (LTV) ratios to make them less secure financially.
A lower LTV ration essentially means that the value of gold against loans is less compared to the total loans issued, reducing the companies' margin of safety.
Indian households and temples, which have a combined over 30,000 tonnes of gold, saw the value of their holdings decline sharply.
However, it is expected that organised jewellery players will benefit from the move. The reduction in duty has been a demand put forward by traders for a long time, as it will slow down smuggling activities.
Low smuggling is always a win for the exchequer. How this impacts the revenue collection of the government is something to be seen as India is a net importer of gold.
A weakening dollar, festive time demand, US elections, geopolitical risks and Central Bank policies are some of the catalysts that can push up the gold prices, according to Jigar Trivedi, a senior commodities analyst with Reliance Securities.
