Speaking to CNBC-TV18 Rajesh Khosla, Managing Director, MMTC-PAMP said that physical buying of gold is less this year. The gold available in the market is at a discount, which shows that smuggling is very much a reality. He attributes smuggling to duty imposition of 10 percent and 1 percent excise.

He is not optimistic about pickup in gold demand in the forthcoming season. “We are still seeing a 2 percent discount for gold in the local market. In this scenario, people aren’t buying officially.”

Since gold is imported into India, official imports can come in at the official price of gold, he said, adding that jewellers won’t buy official gold and sell it at a discount. “Jewellers can sell at a discount only if they buy smuggled gold.

Industry has made presentation to the ministry and the common thread in all of them has been their plea to reduce the customs duty to 5 percent from 10 percent.

Regarding imports for 2016 he said the days of a 1000-tonne gold import are over. “I would imagine gold imports will stabilise at around 500-550 tonnes.

Sanjeev Agarwal CEO of Gitanjali Exports Corp said that jewellery demand has seen a decline in China, Middle East and India which are all price-sensitive markets. With gold prices zooming in the first six months, there has been a hold-back in gold purchases, he said, hoping that the wedding season might bring in some good news.

Any import duty of over 2 percent encourages smuggling, he said, adding that with the GST rollout, things will be different.

He estimates there has been a drop of 30 percent in business for jewellers. He said Gitanjali won’t be affected by the slowdown, he said, as a large portion of the jewellery sales is diamond.



Below is the transcript of Rajesh Khosla and Sanjeev Agarwal's interview to CNBC-TV18's Manisha Gupta.



Q: Physical buying in India may not have declined so much but the imports have definitely fallen and you have seen the high duty as continuing. What are the reasons that you see for all of this?



Khosla: Physcial imports into India in the current calendar year are less than 170 tons. This compares with around 600 tons in the same period of last year. The clear question is why have imports stopped?



Second issue is that gold is available in the market but it is available at a discount which evidences the amount of smuggling that is coming into India thanks to the high 10 percent duty as well as the imposition of 1 percent excise which has enabled jewellers to first liquidate stocks and then continue doing the business in unaccounted for money.



Q: While all those factors still continue, 2016 do you see that ending on a bleak note or will there be a pickup in the second half due to festivities.



Khosla: I am not so optimistic about the forthcoming season because we are now towards the end of August and we are still seeing a 2 percent discount for gold in the local market. In this scenario people are not buying officially. Therefore if the festive season does kick-off those who are doing official transactions will not be so happy, the rest of the industry I think will be quite pleased.



Q: Are the jewellers really making any in the markets because we are looking at heavy discounts in this year, anything between USD 10 on the lower side to USD 80 on the higher side as well?



Khosla: Since gold is substantially imported into India, the official import can only come at the official price of gold. Jewellers will not buy official gold and sell it at a discount in terms of jewellery. So, clearly the only way this is possible is when they are able to buy gold at a discount. You can buy gold at a discount only if it is smuggled gold. You cannot buy gold at a discount otherwise.



Q: So, if there is such a huge amount of unofficial gold coming in or there is such a parallel market there, hasn’t the industry been making presentations to ministry and if they are really moving on this?



Khosla: The Bullion Federation of India has made presentations, the Gem and Jewellery Federation has made presentations, the IBJA has made presentations and the common thread throughout these three presentations is please reduce the customs duty from 10 percent to 5 percent.



Q: What is your sense then if the government does not really move on this what kind of numbers are we looking when it comes to import in India for 2016 and do you think people will continue to invest in gold?



Khosla: I think the days of 1000 tons gold import are over. I would imagine that gold imports into India may stabilise around 500-550 tons.



Remember the sovereign gold bond has now shown a lot of consumer interest because monetisation scheme is one that I think will become stronger as more and more banks get into the act.



Q: There is an increase in imports as Rajesh Khosla was pointing out but the jewellery demand definitely has seen a decline, what do you take from all of that?



Agarwal: The first half has been reasonable disaster not just in India but also in China and the Middle East. All these three markets are price sensitive markets and with gold prices zooming by over 25 percent in the first six months, there has been a holdback in purchase of jewellery across all these price sensitive major markets so far. My estimate is that the second half - Diwali and then after Diwali the wedding season when there are lots of weddings coming up there is going to be very good.



Q: The other point really has been that the jewellers have been offering discounts and this gold is coming in from unofficial channel as Rajesh Khosla just pointed out, how is that impacting you and how do you see the jewellery demand then because of that?



Agarwal: The unofficial channel inflow has gone up tremendously and partially the drop in figures is because of the inflow through the illegal channels. We have seen over the last 15 years that any customs duty or import duty of over 2 percent encourages smuggling. So, duty of 10 percent is very lucrative as far as smuggling is concerned and in spite of all the government effort it has gone up. Going forward with the imposition of Goods and Services Tax (GST) on jewellery, things will be quite different. The entire sales of jewellery in cash will come down over the next 2 or 3 years and there will be a major change in the jewellery sector moving towards organised players, moving towards a cleaner business over the next 2-3 years.



Q: For this year until now, how much has the business come down for the jewellers overall in India and for you as well?



Agarwal: If I take the overall Indian market - retail - the estimate based on my discussions with retailers at the IJS Trade show recently is that there is a drop of about 30 percent in the first half viz-a-viz the same period last year.



If I have to comment on Gitanjali per se, Gitanjali has not really been affected as much with the slowdown and there are two reasons for it. Number one reason, a large portion of the jewellery sales of Gitanjali is diamond jewellery. So, that has got less affected than the gold category because that is not as price sensitive. Second is also the price point within which Gitanjali operates is between Rs 15,000-1,50,000 which again is not as price sensitive as purchase of wedding jewellery of Rs 3 lakh and Rs 5 lakh. So, the impact on Gitanjali is going to be limited. However overall market is down roughly about 30 percent odd in the first half of this year.



Q: If you put both the numbers together what is your sense on what is the import of unofficial import and how much would the total really come out to as of now?



Agarwal: What you need to add to these numbers are the unofficial smuggled stocks that are coming in also. That is the total supply into the country. Having said that if the average consumption for the domestic is in the region of about 800-850 tons, it might not be 850 tons level, it will be lower level of about 700-750 tons or so.