‘Gold demand could return only if gold prices stabilise in rupee terms’

A few months ago, Prithviraj Kothari was appointed as President of IBJA for a period of 5 years. Earlier, he was also the President of the nearly 100 year old BBA (the earlier name for IBJA).

As IBJA President he has already pledged to take steps to eradicate the issue of contaminated gold bars in the market place.

Kothari has been in the bullion business for over 30 years. He helmed RiddiSiddhi Bullions Ltd (RSBL) since its inception in 1994, making it one of the top 10 unlisted companies in terms of sales revenue.

He was one of the few who played a vital role in the introduction of ETFs, ushering in commodity exchanges in the country. He is an advisor to the commodity exchanges in the country. IBJA has also been included in the Niti Aayog for the transformation of the gold market.

IBJA is also one of 24 associations involved in the formation of the Gems & Jewellery Domestic Council of India. FPJ spoke to him on a wide range of issues pertaining to the gold industry as well as his flagship company RSBL.

How do you see the state of the Indian gold market now?

With the gold price near six-year highs in the international markets and near all-time high levels in India, demand is virtually non-existent. In fact, demand has been down since Akshaytritya.

This is true for all industries. IIJS was very poor and even the IJW held in September was not great either. As the domestic gold market is at a discount to the landed cost of gold, imports are very poor. There is abundant scrap gold coming into the market due to the high price of gold overseas.

Demand for gold has gone below pre demonetisation levels. This is further accentuated due to the weak rupee as it makes the local gold price more higher. Demand could return to a certain extent only if gold prices stabilises in rupee terms.

Previously, unofficial gold would have bridged the gap in supply. Moreover, scrap gold is much cheaper than smuggled gold. However, for the gold dealers, jewellers, refiners, etc. who are registered under GST, unofficial gold is no longer an option. The high price has also seen gold with NBFCs enter the market.

How has the higher import duty and GST impacted the markets?

The high incidence of import duty (12.5%) and GST (3%) has seen a liquidity crunch in the gold trade. Quite suddenly, working capital is getting blocked throughout the business cycle of the industry.

For a bullion dealer, he has to pay import duty of 12.5% plus the 3% GST till the money is realised after the sale proceeds are received. Moreover, their cost is further escalated by around 5% as the price is unfixed. Therefore, around 20.5% or more is blocked as working capital for longer periods.

There is no solution in sight as mere reduction in corporate tax will not unlock the locked funds. With financing from the banking sector to this sector only around 16% after purchase as compared to 98% in global markets, the gold industry is caught on a sticky wicket.

In many ways, this is true of all industries across the board. Their working capital requirements have not only shot up but their funds are getting blocked.

Inventory levels too are very high in the industry...

High inventory levels are the bane of this industry. To be competitive one has to maintain inventory to showcase your goods. Only chain stores survive in such a scenario.

In the long run, single store owners would find it difficult to survive. Probably, export of gold in any form could negate the need to maintain high inventories and allow scrap flows to enter the markets upfront. It is also observed that new showrooms are only opened by chain stores.

Individual stores are, in fact, closing down. There are no incentives for the `karigars’ and in machinery manufacturing we are far behind China.

Do you see the SGB and GMS picking up any time soon?

Sadly, both the schemes have flopped. While GMS has garnered just 6 tonnes since its inception, the SGP has only fared slightly better at 20 tonnes. What both the schemes lack is a proper interface between the consumer and the banks.

The trade has to be involved in order to make the schemes take off. Moreover, the SGB does not have a sound secondary market. In fact, it goes at a discount. It is made very complicated by listing the SGB every day in a different date.

It is very difficult to trace and match the details of individual SGBs. Thereby, making the secondary market redundant. Then, the SGB should be ongoing instrument instead of opening it for a few days. There is no proper marketing of the scheme either.

As far as the GMS is concerned, there is no one to convince the consumer the reason why he should park his gold in the GMS. There is no effort to bring the three parties (banks, the centres who certify the quality of gold and the customer who brings in his gold) together and run the whole process smoothly.

We at IBJA have made several representations on various issues like import duty, GST, GMS, SGB, Gold exchanges, spot exchange, Gold bank, Gold Accumulation Plan, gold mining, etc from time to time. On the commodity exchange front we hope to make local delivery bars acceptable on these exchanges.

Then, exports from the domestic tariff area have become difficult as the earlier replenishment scheme through SBI, Scotia and MMTC is no longer in vogue.

Things are far more complicated and we are trying to simply procedures so that jewellery exporters from DTA can get duty free gold easily. We are hoping to convince ministry official on the matter.

In his budget for 2018, the FM had said that gold would be an asset class. However, the latest budget gold is said to be shown only as a commodity.

We can only hope to convince the ministry officials about keeping gold as an asset class and other issues that crop up from time to time. We hope the New Gold Policy changes how the gold industry functions and prospers in future.

What is RSBL doing these days, apart from being one of the largest bullion dealers?

RSBL has diversified into jewellery, refinery and even manufacturing of jewellery. In the last three years we have refined around 30 tonnes of gold. Last year itself, we sold some 3 tonnes of jewellery manufactured by us to jewellery showrooms.

We are in the process of establishing our brand of jewellery as well. We even opened retail outlets towards the process as well. On online gold sales we are very bullish and feel that digital gold could help push SIP to a great extent in gold. We have over two lakh customers for our online sale of bullion.

Do you see Mumbai becoming a Gold Hub ever?

If India is ever to become a gold hub as envisaged earlier, it needs to get its house in order. We need to rationalise and minimise our import tariff as well as lower GST.

With the current rate of import duty coupled with GST, India can never hope to become a gold hub. At this rate we could create and help flourish more centres like Dubai, Hong Kong and the like. We could see Nepal, Myanmar, Sri Lanka and Bangladesh flourish as gold centres with lower import duties.

We should not be satisfied with short term goal of revenues alone and instead concentrate on economies of scale. If India is able to attract global players to India and make it a trading centre, servicing them could in the long run earn you more than just the high tariffs. For, high tariffs carry the burden of unofficial trade as well.

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