Indian gold refiners have nearly stopped imports of gold dore, a semi-pure alloy, as grey market operators offer hefty discounts to market rates and cut into their slender margins, making business a losing proposition, industry officials say.
Most refiners in the world's second-biggest consumer of the precious metal have suspended operations and are struggling to honour long-term supply contracts with miners, they said.
"For the last two months Indian prices have been trading at a big discount," Harshad Ajmera, secretary of the Association of Gold Refiners and Mints (AGRM), told Reuters.
"Refiners can't offer big discounts as they run operations with wafer-thin margins."
India's tax on gold dore is 0.65% lower than the rate on refined gold, so as to make domestic refining viable. But discounts over official prices in the last few weeks have widened to nearly 2% or about $30 per ounce.
Jewellers and bullion dealers were not buying from refiners as they could not offer the same kind of discount available from competing suppliers, he said.
"Our margin is less than 0.5%. How can we match the 2% discount?" asked Ajmera.
Grey market operators, or businesses that smuggle gold from overseas and sell it for cash to avoid the duties, got a boost in July 2022 when India raised its import tax on gold.
Such operators can sell gold at discounts to market prices as they evade the tax of 18.45% on gold, dealers said.
Many Indian refiners are diverting gold dore into refineries in Dubai as they could not sell refined bars at home because of the discounts, said James Jose, managing director of refiner CGR Metalloys.
India relies on imports to meet most of its demand.
The margins of grey market operators are increasing with rising prices, making smuggling even more lucrative, a scenario that can be dispelled only by cutting the import duty on gold to 5%, Jose said.
The AGRM and other trade bodies have asked New Delhi to cut import taxes.
"The government should also increase the import duty difference between refined gold and dore to 1.65%, to make refining viable," Ajmera said.
India imports gold dore mainly from Ghana and Peru, while refined gold comes from Switzerland and the United Arab Emirates.
Gold demand usually picks up during the wedding season as the bullion is an essential part of the bride's dowry in India and also a popular gift from family and guests at weddings.But this year demand is muted as prices have jumped near a record peak, further eroding refiners' sales, said Ashok Jain, proprietor of Mumbai-based gold wholesaler Chenaji Narsinghji.