When the patriarch ends in the country, the festive season begins in the country. However, in some parts of the country, the festive season begins with Ganesh Chaturthi or rather Rakshabandhan. After that, the process of buying gold or gold jewelery in the country also begins. Gold prices are skyrocketing. The price of gold in Delhi, the capital of the country, is around 1.50 lakh rupees. In such a situation, to save tax, most of the buyers in the country are buying gold or gold jewelery in cash without a receipt. Which can be difficult for the authorities to track. People say that this way they are saving up to 6 percent compared to the market price. Let us try to understand it in detail.
The customer gets a discount of Rs 5000
By buying in cash without records, wholesale buyers can save up to 6 percent off the current market price, according to five people involved in the business. Dealers who take cash can avoid tax and pass some of the savings on to customers. Anurag, a resident of Delhi, bought jewelery for his daughter’s wedding. He got a discount of Rs 5,000 on every 10 grams — but received no receipt. With gold prices reaching record levels earlier this year, these savings were hard to ignore for Anurag. He said he saved 60 to 70 thousand rupees on his total bill. However, since the beginning of the year, gold prices have seen a significant decline. Even then, gold prices are 28 percent higher than last year.
The currency of shadow trade is rising again
Anurag said that the offer was very good as he was saving 60 to 70 thousand rupees on the gold he bought. Gold prices are very high and we trust jewelers. He requested that in view of the sensitivity of the transaction, it would be better if only his first name was used. Anurag is one of the buyers who are moving towards this informal business or rather shadow trade. The business has grown since the government more than doubled the import duty on gold and silver to 15 percent. The move was taken to reduce purchases in view of India’s growing trade deficit. Retail customers will have to pay an additional 3 percent Goods and Services Tax (GST).
The demand for gold is met through imports
The resurgence of shadow trade is an unintended consequence of a policy that was designed to reduce demand for gold in India. Being the world’s second largest consumer after China, India buys gold on birthdays, festivals and most weddings. It is used as ornaments, gifts and family savings. Due to low domestic production, most of the demand is met by imports, which puts a heavy burden on the trade bill and the currency. Traders are getting gold at a discount of up to $200 per ounce compared to current local prices in the cash market. Prices vary widely in diffuse and shadow deals, where deals are negotiated individually rather than against a common benchmark.
The Economics of Shadow Supply
Hiren Chandaria, managing director of Middle East and Asia operations at London-based company Monetary Metals, said in an ET report that such a huge discount in the parallel market (informal market) mainly reflects the economics of shadow supply. Higher import duties provide more incentives for gold to come in from outside the official duty-paid channel. In comparison, the discount to landed prices for gold imported through official channels averaged about $50 an ounce in September, according to consultancy Metals Focus. Meanwhile, some retail customers, depending on their bargaining power and their relationship with jewellers, charge Rs.10 per 10 grams. A discount of up to 10,000 can be availed.
More gold is imported than oil
Gold is India’s biggest imported commodity after oil and a major contributor to the trade deficit, which widened to nearly $32 billion in July – its highest level this year. The bill for these shipments rose more than 32 percent in the four months to July from a year ago, prompting Prime Minister Narendra Modi to urge Indians for the second time in five months to avoid purchases and help conserve foreign exchange reserves. However, imports fell to less than half of the year-ago level in August.
A shadow gold trade has almost always existed in India, but when the import duty was 6 percent, there was not much incentive to bypass official channels. The recent surge has revived informal trade ahead of the wedding and festival season, which starts from mid-October to early March. Chandaria said in a media report that even a small percentage difference in today’s gold price creates a big price difference in rupee terms.
