(Kitco News) - India’s new government is set to unveil its first budget and anticipation is high that the budget will include policies geared to more economic growth and perhaps lower restrictions on gold imports.
Prime Minister Narenda Modi’s Bharatiya Janata Party came to power in May, running on a pro-business platform. Members of the BJP hinted that they would consider lowering import restrictions placed on the gold by the previous administration.
Those restrictions included raising the gold import duties to 10% from 2% and imposing an “80-20” rule, where 20% of the country’s gold imports needed to be re-exported in the form of finished goods. Those restrictions reduced gold imports sharply, with demand based in tonnage down 16% in the fourth quarter of 2013 and 26% in the first quarter of 2014.
Given Modi’s hints of a relaxation in restrictions on gold imports, gold-market participants are hoping this could revive some the sagging Indian demand. Physical demand in general has been lackluster for the past several weeks, so a pickup in Indian demand at this time would be welcomed by the bullion trade, several market participants said.
“Overall the market would have been much stronger (last year) if we had had a stronger Indian gold buying that what we have had,” said Michael Widmer, metals strategist,
The previous government levied the restrictions because lawmakers thought strong gold imports were partially behind rising current account deficits. Since then the current account deficit has fallen, and may give the Modi government some flexibility to change the import rules.
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Growth-Oriented Budget Expected
Economists expect the new budget to focus on economic reforms and growth-oriented policies. Analysts at Nomura said they expect some rise in the fiscal year 2015 deficit target to 4.5% of gross domestic product, from the 4.1% interim budget target, as the current administration pays off subsidy bills from last year. However, they forecast medium-term fiscal consolidation is likely and expect a deficit target of 3% of GDP by fiscal year 2017.
The Modi government is likely offer a plan to lower subsidies and implement a goods and services tax, Nomura analysts said. Also, the budget will likely include more infrastructure investment and measures to attract capital flows, among other things.
Media reports suggest Modi may lower the import duty to 8% from 10%. “Although (it is) not as large a cut as expected or hoped for, the direction is certainly positive,” said Frank Holmes, chief executive officer and chief investment officer with U.S. Global Investors.
Jim Steel, analyst at HSBC, said the market’s outlook for a fall in restrictions has tempered.
“I think they (market participants) were thinking the restrictions were going to be relaxed (significantly) but more recently, some element of uncertainty over that has been injected. It’s not quite as much a one-way bet, as say right after the election. I think we will see some modest reduction, but it may not be a market-mover,” he said.
The overall macroeconomic picture for India is at least as important as the budget itself, Widmer said, as there are fewer pressures on the external side.
“Modi acknowledged there were a lot of headwinds to the domestic Indian gold industry…. If there is also a view that there (are) more growth-oriented policies being implemented, that could attract more (capital) inflows that could ease the external pressures as well. I think Modi would allow a bit of an easing in terms of import restrictions. It’s the entire package you have to look at,” he said.
If there are reductions in the restrictions, could there be an immediate market impact?
“Possibly,” Widmer said. “Put it this way, if you do see anything that … would indicate a pickup in gold demand, the market would not necessarily take it as bearish.”
Steel isn’t so sure that a drop in import restrictions would move the market.
“I sense that the decent investment demand for gold is not predicated on expectations for it, or for an immediate recovery in Indian demand,” he said.
In addition to the budget, Widmer said the gold market is also looking at the monsoon, which has delivered less rain than expected. He said that’s had a bit of a market impact, too.
Less rain could mean a lower harvest for farmers. Indian farmers are big buyers of gold, so if they have less money in their pocket, it could mean less disposable income to buy gold.
“If we have a bit of a bad harvest, you could have an offset in underlying gold demand…. Having said that, the more immediate impact on gold market would come from a change in legislation, in the import restrictions by the government,” Widmer said.
Yet Steel pointed out that gold prices have been holding up despite the sluggish physical demand and the lack of Indian investment.
“What’s interesting about gold prices is the market has been doing relatively well without them, in absence of anything happening in India. (That) tends to make me think it’s not emerging markets or physical demand that’s driving the gold price right now…. We’ve had some good fund demand, a geopolitical risk element in the market and gains from liquidity,” Steel said.
By Debbie
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