28 February 2016 witnessed Vedanta Limited, a unit of Vedanta Plc, London, win India’s first ever gold mine auction. Vedanta’s bid of 12.55% of Indian Bureau of Mines price of $1,087 per ounce (Rs 74,712 ; 1 troy ounce = 31.10 gram) was the highest amongst the three that placed bids for the Baghmara mine in Chhattisgarh.
The Baghmara mine is located 130 kilometres north east of Raipur, the state’s capital, and is part of Bhalodabazaar–Bhatapara district area. Spread over 6.08 sq. km., the mine has the potential to yield 2,700 kg of gold. Mining is expected to commence by 2017. Baghmara is first of three mines expected to be auctioned in 2016.
Unlocking the Value of Privately Held Gold
With government opening up mining of gold to private sector, it is expected that the resulting increase in domestic gold production will contribute to reducing India’s foreign exchange outflow on account of gold imports.
India is the world’s second largest consumer of gold and also the second largest importer, after China. In 2015 alone, India imported gold worth $36 billion and since 2010, the government in power has been forced to try out various measures to curb demand for gold in the country.
India has traditionally viewed gold as an asset hedge against future uncertainties. As a result, it is estimated that Indian homes and temples hold over 20,000 tonnes of gold in the form or ornaments, coins etc, and mobilising this could help the government unlock its value and generate much needed funds for infrastructure and social sector spending.
The government has been offering various incentives to encourage people to bring out their gold collection but the same has met with little success, as most people, especially those in rural India, still believe it is safer to hold onto gold than any other form of investment.
Raising Duties to Fight Imports
In 2013, the UPA II government had raised import duty to 10% but this move only led to an increase in gold smuggling to the tune of 175 tonnes, a trend that continues till date. Raising duties doesn’t help since the smuggled gold only denies the government its share of revenue.
Paradoxically, if the government were to lower the import duty, it only fuels greater demand for gold, which leads to greater imports and higher forex outflows. And this has been Finance Minister Arun Jaitley’s biggest dilemma.
In this context, the NDA government’s decision to open up gold mining to the private sector is widely seen as a welcome move, one that will see increased investment in mining that will lead to higher domestic production and therefore lesser import of gold.
Gold importers, retailers and general consumers have been hoping that the FY16-17 budget would see a reduction in import duty by 4-5%. In anticipation, consumers too, were holding back purchases on the assumption that lowering of import duty would see an increase in gold imports and lead to lower prices.
Contrary to expectation, FM Jaitley has refrained from reducing the import duty on gold. The markets in India reacted with gold prices increasing by 1.4%, as markets opened on Monday after the budget announcement.
Higher duties have resulted in lesser imports, and February this year saw gold imports at its lowest levels since 2013. With gold trading agencies and banks importing less, and consumers refraining from gold purchases, retailers and dealers of gold are left with high inventories of unsold gold.
The resulting financial stress is forcing them to offer discounts ranging from $50-53 per ounce. Despite this, gold purchases have not been picking up, and now the current budget has poured water on any hopes of gold demand rising in the short to medium term.
Since the start of this year, international spot prices of gold has been touching peak rallies, not seen since August 2011. However, international price of gold is now likely to come under increasing pressure as India continues to import at subdued levels.