Will duty hike stop Indians from buying gold?

It is true that Budget 2012 did not bring much cheer for India Inc. Buit was particularly bad for gold and jewellery sellers, who have shot shop for the last three days, protesting against the hike in custom duty on gold.

The government has hiked the customs duty on imported gold to 4 percent from 2 percent, and hiked excise duty on refined gold to 3 percent from the previous 1.5 percent. It has also asked jewellery manufacturers to collect 1 percent tax while selling jewellery above Rs 2 lakh.

According to most analysts and research reports, the doubling of customs and excise duties will be a mood dampener for gold buyers. And as and when the global economic crisis will sort itself out, gold could lose its safety status, reducing demand even more.

Titan, a major Tata group player which mainly sells gold, jewellery and watches will be affected due to the hike. Since the gold players will be passing on extra cost to the customers, demand could be affected because of higher prices.

S Subramaniam, CFO, Titan, told CNBC TV18, the hike in duty from 2 to 4 percent will applicable for Titan as they buy their gold in bars. “But I don’t think it will affect demand significantly. Gold base rate has gone up significantly over past one year.”

In the last quarter gold volumes dropped by about 44 percent and demand has been affected. But Titan posted a 25 percent rise in sales. “You are going to have some continuing decline on volumes possibly with these high rates, however, the category as such is not declining. In fact, I would think the category should expand,” Subramaniam added.

However, T Gnanasekar, director of CommTrendz Research & Fund Management, thinks otherwise. “Logically demand should fall, but we have seen that market participants or rather people who have been buying gold haven’t been deterred by the way it moved from Rs 5000 in 2005 to almost Rs 30,000, which is like 300 times, " he told CNBC-TV18.

So the rise in taxes could see a short term dip in demand, but in the longer term it will not be a great determining factor. However, what could worry major players is the issue of compliance. Unbranded smaller players could evade such collections, especially the 1 percent duty for expensive jewellery in order to draw more customers. In that case, players like Titan will suffer.

But on the flip side, customers of Tanishq (Titan’s brand of jewellery) would be more sticky in nature as they belong to a premium class and are unlikely to shift to unbranded jewellery due to the price hike.