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The adage “The pen is mightier than the sword” was proven by Finance Minister Nirmala Sitharaman when she announced a cut in gold customs duty in the Union Budget 2024. This decision caused gold prices to tumble over five percent, wiping out over Rs 10.7 lakh crore in value in just one day. This move marked the sixth largest wealth erosion compared to the equity markets.
The wealth destruction hit more households than the major falls in equities, as a higher number of households own gold. Indian households, holding around 11 percent of the world’s gold, are impacted significantly. This ownership surpasses that of developed nations like the USA, Germany, Switzerland, and the IMF combined. Since the year began, gold prices surged by 14.7 percent, outperforming the Sensex’s 11 percent rise. However, in July, MCX gold dropped by nearly 5.2 percent.
During the Budget, the Finance Minister announced a reduction in Basic Custom Duty on gold and silver from 10 percent to 6 percent and the Agriculture Infrastructure & Development Cess (AIDC) from 5 percent to 1 percent. This move effectively reduces overall taxes on gold from around 18.5 percent (including GST) to 9 percent.
Gold traders reacted by selling off their holdings to book profits. Gold financiers were displeased as the reduced value of gold lowers their loan-to-value (LTV) ratios, making them less financially secure. A lower LTV ratio means the value of the gold securing loans is less compared to the total loans issued, reducing companies’ margin of safety. Indian households and temples, owning over 30,000 tonnes of gold combined, saw the value of their holdings plummet.
Organized jewelry players are the beneficiaries of this move, as the reduction in duty, a long-standing demand, will likely slow down smuggling. For the exchequer, lower smuggling is always positive, although the impact on the Centre’s revenues remains uncertain as India is a net importer of gold.
Several catalysts could push gold prices back up, including a weak dollar, festive demand, US elections, geopolitical risk, and Central Bank policy, noted Jigar Trivedi, senior commodities analyst at Reliance Securities.
