Interestingly, agricultural and non-agricultural commodities both have received the attention of Finance Minister Nirmala Sitharaman in the Union budget 2024-25.
In the non-agricultural commodity sector, the most important announcement was the sharp reduction in customs duty on gold and silver—from 15% to 6% ad valorem. What prompted such a massive fiscal relief, despite the government’s accepted position that gold is a demerit commodity, is unclear. The revenue foregone is another point; it hasn’t been quantified.
To be fair, international gold prices have risen in the last two quarters to the extent of 20-25%, to a new record high of about $2,450 an ounce recently. This was the result of unabated geopolitical tensions, purchases by central bankers, especially China, and of course, the inflow of huge speculative capital.
The international market price movements promptly reflect in the domestic price of the precious metal as India is almost entirely import dependent and trade is largely unregulated. Taking a cue from the global market, domestic rates too reached unprecedented levels—above Rs 70,000 per 10 grams. This resulted in slowing physical jewellery purchases by consumers, as gold demand is price elastic.
While sharp rise in international prices created some justification for a commensurate reduction in our customs duty, the Finance Minister has been extraordinarily generous in allowing a 60% relief in customs duty. The bullion trade is of course delighted.
Soon after the budget announcement, domestic prices collapsed. Gold fell by Rs 4,000 per 10 grams to a four-month low, while silver prices fell to a three-month low. There is reason to believe there’s more downside correction left for gold, perhaps to the extent of Rs 1,500.
Will the current decline in bullion prices spur demand? It is doubtful. Of course, the upcoming festival season and marriage season will surely boost demand to an extent, but the trend may not sustain. Jewellery makers would be happy to liquidate their excess inventory.
Where do we go from here? In the short term, gold is likely to fall further. It is worth mentioning that gold prices actually carry a war-risk premium of up to $200/oz. If tensions abate or a ceasefire is declared, gold rates will collapse and move closer to $2,000/oz; that’s the risk the gold market carries.
The Finance Minister referred to critical minerals needed to pursue our energy transition efforts. In a welcome step, the budget has liberalised the import of several metals like lithium, nickel and so on.