Gold Imports by India Tumble as Curbs Boost Costs

Gold imports by India, the world’s largest consumer, are plunging as an increase in tax and restrictions on financing shipments boost costs for jewelers, helping the nation contain a record current-account deficit.

Shipments in June will decline as only orders placed before the curbs are being imported now, said Rajesh Mehta, chairman of Rajesh Exports Ltd. (RJEX) Overseas purchases tumbled to an average $36 million a day in the 14 business days through June 7, compared with an average $135 million a day through 13 days until May 20, Raghuram Rajan, chief economic adviser in the Finance Ministry, said in a statement on June 11.

India’s rupee slumped to a record this week partly on concern that the current-account deficit will widen from an all-time high in the last quarter of 2012. Imports surged in the past two months as buyers thronged shops for ornaments, coins and bars after bullion entered a bear market in April as investors sold the metal in favor of riskier assets on speculation that the global economy was recovering.

Jewelers Hit

The government raised the import duty to 8 percent from 6 percent on June 5, a fourfold increase from January last year. The central bank has also placed restrictions on overseas purchases on a consignment basis and limited imports for local consumption against cash only. The curbs will change the financial models of jewelers in the country, said Bhaskar Bhat, managing director of Titan Industries Ltd. (TTAN) Shares of Titan and other jewelers have slumped in Mumbai this week on concern rising import costs may hurt their profit margins.

The shortfall in the current account, the broadest measure of trade, was $32.6 billion in the last quarter of 2012 and is the biggest risk to the $1.9 trillion economy, according to the central bank.

Unproductive Imports

“In the longer run, it may not be the solution, but gold is a large component of imports and is deemed to be unproductive so the government is trying to make gold less attractive,”Crisil’s Joshi said. The decline in imports may bring down the trade gap in the second half of the year, he said.

Imports were 117 metric tons in April after prices plunged to a two-year low, according to Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation. Purchases were estimated at 162 tons in May, according to the Finance Ministry. Shipments may decline by as much as 20 percent in 2013 from 860 tons a year earlier, according to Bachhraj Bamalwa, a director at the federation.

The rupee touched an all-time low of 58.9850 on June 11. The currency’s 6.7 percent drop against the dollar this quarter is the biggest in Asia.

Shares Plunge

Gold for immediate delivery was at $1,389.51 an ounce in Mumbai on 13 June, down 17 percent this year. Prices reached a two-year low of $1,321.95 on April 16 after rallying for the past 12 years in the longest bull run in at least nine decades.

The curbs on bullion imports and financing will increase the debt levels of jewelers, Titan’s Bhat said. Jewelers may be forced to pass on the increase in import costs to consumers, Rajesh Exports’ Mehta said.