Cut in gold customs duty wipes out over ₹10 lakh crore from Indian market

Gold prices in India fell by over 5% in a single day soon after Finance Minister Nirmala Sitharaman announced a reduction in gold customs duty in the Union Budget 2024, wiping out more than ₹10.6 lakh crore and resulting in the sixth-largest wealth depreciation ever observed when compared to the equities market.

More significantly, the wealth loss would have likely hit considerably more households than the damage caused by the large drops in stocks, because of the sheer number of Indian households that possess gold.

Indian households collectively possess 11% of the world's gold reserves, which is more gold than the International Monetary Fund (IMF), the USA, Germany and Switzerland put together.

Gold prices have been on an absolute rampage since the year began, rising 14.7% and surpassing the Sensex, which has increased by almost 11% in the same period. Multi Commodity Exchange of India Limited (MCX) gold has decreased by over 5.2% so far in July.

Finance Minister Nirmala Sitharaman announced during the Union Budget that the Agriculture Infrastructure & Development Cess (AIDC) would drop from 5% to 1% and that the Basic Custom Duty on gold and silver would drop from 10% to 6%. By doing this, the total taxes on gold will be lowered from around 18.5% (including GST) to 9%.

The decision to lower the price of gold infuriated traders, who started liquidating their holdings and booking profits.

The decision infuriated gold financiers as well since it lowers the value of gold and will drastically lower their loan-to-value (LTV) ratios, which will weaken their financial position.

Reduced margin of safety for the companies results from a reduced LTV ratio since the value of the gold used to secure loans is lower than the total amount of loans given.

Before approving a mortgage, financial institutions and other lenders look at the loan-to-value (LTV) ratio as a measure of lending risk. Loan assessments with high loan-to-value ratios are often regarded as higher-risk loans. Consequently, the loan has a higher interest rate if the mortgage is authorized.

The value of gold held by Indian homes and temples, which collectively possess over 30,000 metric tons of the metal, experienced a significant decline.

On the other hand, organized jewelry players stand to gain from the change. Tradespeople have long demanded a duty decrease because they believe it will curb smuggling.

A decrease in smuggling is usually advantageous to the exchequer. It is unclear how this will affect the government's future revenue because India is a net importer of gold.

According to Jigar Trivedi, senior commodities analyst at Reliance Securities, a weak dollar, festive time demand, US elections, geopolitical risk, and central bank policies are some of the factors that could drive gold prices back up.