India’s demand for gold to lag in 2018 due to GST

The demand for gold in India is expected to remain below its 10 year average for the third consecutive year in 2018. This is due to higher taxes and new transparency rules on the purchases that may cap last year’s rebound in buying.

India has always had a high demand for gold and is the second largest gold consumer in the world and a lower demand could rein the global prices which have increased by 8 percent since December. A drop in gold imports can help India reduce its trade deficit. According to Somasundaram PR, managing director of WCG’s operations, the consumption of gold in 2018 will remain between 700 and 800 tonnes as compared to 727 tonnes last year.

India’s demand for gold averaged 840 tonnes over the last decade. The main reason for the lag in demand is higher goods and services tax on the purchases which was imposed in 2017 in addition to the measures to track gold purchases. GST on gold was raised from 1.2 percent to 3 percent and India made it mandatory for the customers to disclose their tax code or PAN for high value purchases of gold. These two moves have disrupted the business of small jewelers who account for almost two thirds of the total sales in India.

There will be more changes coming up like responsible gold sourcing and hall marking which will continue to disrupt the industry. It could take two years for the country to reach the normal demand level. Gold is a mainstay in India’s culture and serves as a primary vehicle for household savings of hundreds of people in the economy. The demand in the country rose by 9 percent in 2017 to 726.9 tonnes as the demand for jewelry rose 12 percent from last year.