Industry Awaits One Nation, One Gold Rate

Even after the introduction of the goods and services tax (GST), prices of gold vary significantly across channels and locations in India. Moreover, lack of transparency in pricing and price distortions across the value chain are common sights. The bullion and jewellery industry has long rooted for a spot gold exchange to address the issues of price disparity and fragmented liquidity of gold in the Indian market. Team Floroscent gets in touch with trade insiders and the bullion industry experts to bring an analytical report on how to establish equilibrium between various factors defining the gold prices.

India welcomed the Goods and Services Tax (GST) on 1 July 2017.In his Parliament speech, Prime Minister Narendra Modi said, “GST marks the economic integration of India.” It is expected to unify India through the creation of a single market for goods and services—as the GST slogan goes, ‘one nation, one market, one tax.’ Though the disparities on taxation have gone after the GST, differential pricing of gold across states remains a reality. In each state, the price of gold is fixed by a set of bullion dealers. Although the dealers take into account the international rate and add up customs duty and 3 per cent GST to arrive at the market rate, a uniform price across markets still remains elusive because of the local pulls and push in that particular market.

In the pre-GST era, the main reason for such differential pricing was varied tax rates existing in different states. But even after GST introduced uniform taxation across states, gold prices are not identical across the country.

It would be a rare event to find that the gold price in Mumbai, New Delhi, Kolkata and Chennai were the same on any given day. The rate for 10 gram of 24 carat gold in Multi Commodity Exchange (MCX) was Rs. 29,507 on November 24, 2017. In Mumbai, this was Rs. 30, 941, Chennai Rs. 30,128, Delhi Rs. 30,267, Kolkatta Rs. 30,951, Bangalore Rs. 29,251, Hyderabad Rs. 30,160, Kerala Rs 29,572 and Bangalore Rs. 29,251. Between Kolkatta and Bangalore, there was a price difference of Rs. 170 per gram.

Following the GST regime, jewellers are demanding an all-India price of gold. This will bring an end to the age-old practice of having different gold prices for different cities, based on local taxes and other factors.

According to MP Ahammed, chairman, Malabar Gold & Diamonds, the vexing trend in gold prices happens despite a single GST rate of 3 per cent across the country. “In the pre-GST era, the brunt of the blame for such differential pricing was borne by varied tax rates existing in different states. But even in the post-GST scenario, the reality on the ground has not changed much. This calls for attention from the government, not just because we are the fifth-largest consumer of gold in the world or gold forms the second-largest asset class in the household savings basket after land but also because of our resolve to create a single market. It is a fact that GST alone cannot bring the desired order, transparency and discipline into the sector where unorganised players and unaccounted businesses dominate,” he notified.

 

Factors influencing gold rates

Ideally, the rate of gold is determined by the international gold rates on a particular day. Then logically, the gold rates should be the same everywhere but that doesn’t exactly happen, as there are various other factors that decide the pricing of the yellow metal in India, including transportation cost, discounts by vendors on bulk purchase, involvement of too many big and small bullion associations, import duty on gold and the value of rupee against an international currency like the dollar.

The organised players operating across states find such differential pricing difficult, as the margins differ from one state to another. Most of them procure gold from official channels, paying custom duties and retail it in different states as per micro market rates.

Sanjeev Agarwal, core committee member FICCI Gem and Jewellery Forum opined that the GST needs further tweaking to bring standardisation in the gold prices. “The new tax system needs further regulatory props or support from the authorities to weed out the undesirable elements that trigger divergent prices. Moreover, the demand-supply scenario comes into play while fixing the price. Presence of duty-free smuggled gold in the market also influences the prices. This is disadvantageous for organised players procuring gold from official channels. Lowering of customs duty will help bring down the quantum of smuggled gold,” he suggested.

India’s diversity plays an important role too. Each region characterised by different seasonal patterns of demand and consumer tastes, with different trading centres each capable of creating their own gold price at any given time. For example, the local gold price in Kolkata usually comes from the price published by the West Bengal Bullion Merchants and Jewellers Association (based in Kolkata) and similarly, the price in Chennai comes from the price published by the Madras Jewellers and Diamond Merchant’s Association.

A major lacuna in the regulatory ecosystem is the lack of an official oversight body that looks into the price formation in gold market. Currently, the dealer with high inventory sell their gold holding at a lower than the prevailing price quoted by banks. In contrast, those with lower inventory level always try to get premium. This creates a massive price difference of up to Rs 200 per 10 grams at the stockist level between the two subsequent dealers and therefore, retailers in the same area create opaqueness in the entire bullion trade system,” said Kumar Jain, president, Jewellers Association Mumbai.

‘India reference’ price

India is one of the largest consumer and importer of gold but still it does not have a major say in deciding international gold prices. Speaking at the fourth India International Bullion Summit in Mumbai Aram Shishmanian, chief executive of the World Gold Council (WGC) raised this pressing issue. “India imports around a quarter of global gold production but has no say in the global price. There are two basic needs India can emphasise on to achieve this, as London is no longer going to remain the sole market for global gold trade – purity and transparency. India’s spot gold price discovery is opaque. As the trade is shifting from the west to the east, India cannot remain silent any longer.”

In the last decade, some of the major international gold markets have setup gold exchange. China introduced a gold spot exchange (Shanghai Gold Exchange) early on. The creation of SGE transformed physical gold trading in China, bringing transparency and market driven pricing mechanism to the market. Because of the exchange China has gone from being a price taker to playing a significant role in influencing the global gold prices.

Turkey, whose gold market is very similiar to India, established the Istanbul Gold Exchange (IGE) in 1995. Setting up of IGE introduced transparency to the market with greater pricing efficiency.

“With a Spot Gold Exchange in India the price disparity the people have in the market today will reduce very much.  According to me, if the bullion bank is there, the prevalent difference of parity and disparity will be reduced to great extent. But, the government or its nominated agencies need to sell imported gold only through the bullion exchange to make the venture viable,” said Prithviraj Kothari, managing director, RiddiSiddhi Bullions Ltd.

“The bullion exchange in Turkey is successful only because of the government’s selling of imported gold through it. A similar exchange in Shanghai is successful because it offers exchange rate arbitrage. Thus, state or nominated agencies need to distribute gold only through the proposed exchange,” he added.

Uniformity aimed

Recently, the World Gold Council (WGC) had mooted a proposal to set up a Spot Gold Exchange to fix single pricing for the entire country. “Similar to Shanghai Gold Exchange, India too should have a single spot exchange. This will make pricing more transparent,” said PR Somasundaram, managing director, WGC India.

WGC has been engaging with the industry players to get their views on this. It will come up with a formal proposal by the fourth quarter of this year. “It should be a requirement of the industry and the government can make necessary regulations to facilitate such an initiative,” he added.

“Although, GST has subsumed a web of local and central levies such as Excise, VAT, Service tax and Octroi into a single tax, gold prices are still not fully uniform. The advent of gold spot exchange will bring a transparent platform where industry will trade locally instead of depending on the international market,” said Saurabh Gadgil, director, India Bullion and Jewellers Association and CMD, PNG Jewellers. 

Highlighting the need of a spot gold exchange, K Srinivasan, Convener Gold Jewellery Panel, GJEPC and managing director, Emerald Jewel India Ltd said that active government role would make the venture successful. “Absence of a gold exchange leads to disparity in prices across the nation. A spot gold exchange is a very good option as a starting step towards the financialisation of gold. There is an increasing need to make gold trading more transparent and diverse. India should play a leading role and try to become a major trading hub for precious metals .Besides eliminating the price disparity, a spot gold exchange will help the trade in a number of ways. However, active government support is required to bring standardisation across the whole gold value chain,” he shared.

Quite obviously, the government and the trading community must come together and form a transparent price discovery mechanism for gold. An exchange in India would help much to create a vibrant gold ecosystem matching India’s large share of global gold consumption, leading to efficient price discovery, assurance in the quality of gold, active retail participation, greater integration with financial markets and greater gold recycling.

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