Finance Minister Nirmala Sitharaman made headlines with her decision to cut the gold customs duty in the Union Budget 2024, causing a dramatic drop in gold prices. The reduction led to a significant 5% decline in gold prices, erasing over Rs 10.7 lakh crore in value in just one day. This marked the sixth-largest wealth erosion ever recorded, and its effects were felt more broadly than declines in equity markets, given the higher number of households owning gold compared to those holding equities. Gold Prices on July 22 was Rs. 72,875/ per 10 Grams whereas on July 23 prices was slashed to Rs. 69,269/ per 10 Grams.
Indian households collectively own around 11% of the world’s gold, surpassing the reserves of major nations like the US, Germany, and Switzerland. This vast gold ownership means that the impact of the price drop was substantial for many Indian households.
Why Did Gold Prices Fall?
The Finance Minister’s budget announcement included a reduction in the Basic Customs Duty on gold and silver from 10% to 6%, and a cut in the Agriculture Infrastructure & Development Cess (AIDC) from 5% to 1%. This brought the total taxes on gold down from about 18.5% (including GST) to 9%.
Who Was Affected and How?
Gold traders responded by selling off their holdings, capitalizing on the high prices before the duties were reduced. Gold financiers also faced challenges as the drop in gold prices decreased the loan-to-value (LTV) ratios on gold-backed loans, thereby reducing their financial security.
Indian households and temples, holding over 30,000 tonnes of gold, saw a sharp decline in the value of their assets. Conversely, organized jewelry retailers are expected to benefit from this move. The reduced duty is likely to curb smuggling, which has been a persistent issue, and is a positive development for the exchequer.
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