Silver, the poor man’s gold, has turned out to be the winner in India’s budgetary excise duty cuts by escaping the attention of the Finance Minister. Investors in India are keen to push silver above the recent channel high with traders insisting that it will be more than speculation that will drive demand for the white metal.

“Silver has clearly been exempted for a reason,” said Prithviraj Kothari, president of the Bombay Bullion Association. “Out of $50 billion worth of imports of precious metals into India, silver imports were just $4 billion, while that for gold was the other $46 billion,” he said.

On Friday, India’s Finance Minister exempted branded silver jewellery from excise duty. Silver coins of purity 99.9% and above were also exempted from excise duty. However, the excise duty on refined gold was doubled from 1.5% to 3%.

Kothari was of the opinion that silver coins and silver bars, called `chausar’ in the local lingo and among bullion traders across the country, would soon sell like hot cakes. “There is not much demand for silver jewellery among Indian investors. Most go for high value silver coins or for a 1 kilo silver bar. The latter is expected to fly off the shelves now and investor interest would surely be pushed higher as a consequence of the double whammy on gold in the budget,” he added.

Kothari added that the price of silver was bound northward since investor interest had shifted given its usage in solar panels. Panel makers consume about 12% of the world’s supply of silver, the material in solar cells that conducts electricity. 

Silver paste is used in 90% of all crystalline silicon photovoltaic cells, which are the most common solar cells. Though the solar industry is not the largest consumer of silver, it is a growing market that could give silver producers a boost, say traders.

“It is something whose time has come. Most of the markets that silver serves follow traditional supply and demand economics and therefore competition is based on price, product line, and service.  In the case of a hyper growth industry such as the photovoltaic industry, silver is bound to streak ahead,” added Kothari.

The rise in solar power is arguably the most significant development for silver demand in recent years. A GFMS report noted that over the last decade, the sector’s offtake had climbed rapidly, soaring from less than 2 million ounces to an estimated 50 million ounces in 2010. In 2011, demand was expected to reach nearly 70 million ounces, an increase of 40% year on year. So analysts expect demand from this segment to keep growing. 

In precious metals, silver was down 0.65% in the international markets at $32.36 an ounce, bringing the gold to silver ratio, which is the number of ounces of silver needed to buy one ounce of gold, to around 51.0, the highest for two weeks and reflecting silver’s underperformance relative to gold.

In India, a depreciating currency has also played spoilsport. The Indian rupee has tumbled by 16% against the US dollar. Some traders insist that as silver was left out of the latest budget tax increase, it may benefit from speculative plays and the spread between gold and silver should narrow.

“Silver has remained outside the double tax on other precious metals. But one should not forget that recently the silver import duty was raised to 6% of the value to discourage imports and enable better utilisation of forex reserves,” said Sunder Raghavan, bullion trader.

“In purely psychological terms, the news is likely to weigh on the price of gold and in the current market could help ensure that the gold price does not increase significantly in the near future,” Commerzbank analysts said in a note, adding that following a rollercoaster ride in 2011, rising industrial demand coupled with growing investor interest should prompt a sustainable increase in the price of silver this year.

In the case of gold though, the analysts have said, “This could lead to lower imports, which would remove an important crutch from the price of gold.”

Traders point out that silver has several industrial uses. “This year, it is estimated that global industrial demand for silver largely driven by India and China will increase by 30%, from 487 million ounces in 2010 to 624 million ounces. At a time like this, the Finance Minister excusing silver from its taxation basket is heady news,” said Udayan Murti, bullion analyst with a broking house.

Kothari was of the opinion that though India imported around 4,800 tonnes of silver last year, this year imports would hinge around 3000 to 3500 tonnes. “Last year there was a lot of consumption. With inflation on the rise this year, there is not much savings left in the hands of individuals. Though the `chausar’ bars are still a hot property amongst the regulars, the budgetary proposal to fully exempt branded silver jewellery from excise duty will result in an increase in the number of branded silver jewellery items. Currently, there are only a few brands in that segment. So, that will be one segment that is bound to grow now,” he added. 

Traders and analysts added that silver has been the underestimated bullion with immense savings potential that may help in capital formation for future growth. “This (exempting it from budgetary tax) seems to be a welcome step to realise its untapped potential. Moreover, it has a broader reach across income groups compared to other precious metals, because of pricing,” said Murti.