Finance Minister Nirmala Sitharaman

A new international bullion exchange has been proposed as part of the Union Budget in India this weekend. In a speech to India’s parliament, Finance Minister Nirmala Sitharaman unveiled plans for an exchange to be created in Gujarat’s GIFT City, with investors optimistic this would be a managed way around current strict import restrictions on gold and silver, as well as overvalued exports.

Gold is subject to a 12.5% import duty, with gold coins having been raised from 10% to 12.5% this weekend. Silver was also already at the 12.5% rate, but due to the shortage of platinum and palladium, import duty has been lowered to 7.5% in most cases.

Rapid price rises in 2019 caused a decrease in consumer demand for gold, with Q3 only having 22 tonnes of gold bought in India. In contrast, by the end of December this had doubled to 45 tonnes, in line with the global gold prices coming down slightly, but this still put demand down 10% for the year.

The industry wants a decrease on gold imports to just 4%, but the government is against this and instead hopes to meet both the bullion and jewellery industries halfway with the proposed international exchange in Gujarat. The project could be completed during the 2020-21 financial year, and in the words of the World Gold Council, such an exchange would “benefit the entire supply chain particularly, small players and exporters”.

At the heart of the latest budget is still the ‘Make in India’ programme, which aims to dissuade imports of cheap, low-quality material, and support domestic firms instead. The Indian government believes these goods to be harming the economy and undermining India’s growth. Not everyone is onboard with this though. Krishnamurthy Subramanian is the Chief Economic Advisor to the Indian government and he proposed freer trade, not stricter duties, to ensure India’s continued economic growth.

Despite this, the World Gold Council’s 2020 forecast expects an improvement in gold demand in India this year, as the result of efforts to improve India’s economy. According to their predictions, India will buy between 700 and 800 tonnes of gold as bullion, jewellery or for industrial purposes – up from 690 tonnes last year. One big factor to monitor will be the strength of the US Dollar. The greenback has pressured foreign currencies such as the Rupee in the past 18-24 months, making assets like gold less affordable, but if the Dollar loses ground then the Indian Rupee will gain additional purchasing power, making gold and silver more appealing while consumers have the window of opportunity to get the precious metals for a fairer price.