Excise duty hike unlikely to affect gold jewellery demand

Gold jewellery demand could well remain steady this year, although rural purchases will depend on the monsoon rains


Demand for gold jewellery in 2015 was 654 tonnes, a 5% rise year-on-year. This was slightly shy of the last six-year high of 657 tonnes. Photo: Priyanka Parashar/Mint
Demand for gold jewellery in 2015 was 654 tonnes, a 5% rise year-on-year. This was slightly shy of the last six-year high of 657 tonnes. Photo: Priyanka Parashar/Mint

Jewellers have been on a strike for the past two weeks protesting against the excise duty hike. In the Union budget 2016-17, excise duty on jewellery was increased from nil to 1% (without input tax credit benefit; 12.5% excise duty with input tax credit).

What has been the impact? Harsha Sodhani, a senior analyst at India Ratings and Research, says, “The last 15-odd days were anyway a lean period for demand due to lack of festive season and fewer wedding days.”

Nevertheless, it is worth remembering that gold demand in India typically tends to be price inelastic. As a result, the excise duty hike may not have a meaningful impact on overall consumer demand. In fact, shares of Titan Co. Ltd and PC Jeweller Ltd have gone up 3% and 8%, respectively, so far since 26 February.

The chart shows that demand for gold jewellery in 2015 was 654 tonnes, a 5% rise year-on-year. This was slightly shy of the last six-year high of 657 tonnes.

India Ratings and Research expects jewellery demand to remain strong and grow between 3% and 5% to reach 670-685 tonnes in 2016, driven by wedding-related purchases. The rating agency expects retailers to fare well underpinned by a sustainable domestic demand, shifting preference towards branded jewellery and fading regulatory headwinds. If they’re correct, the hike in excise duty could be easily passed on to the consumer.

In short, gold jewellery demand could well remain steady this year, although rural purchases will depend on the monsoon rains. But if the prognosis is that demand will be decent and is also price inelastic, perhaps the protestors are complaining too much?

The writer does not own shares in the above-mentioned companies.

Sponsored Links by Revcontent