New Delhi, Jan. 21: The government today hiked the import duty on gold to 6 per cent from 4 per cent to curb the huge appetite for the yellow metal that has contributed to a widening current account deficit and a plunging rupee.
Top finance ministry officials said, “We feel this is the optimal duty, raising it beyond 6 per cent would lead to smuggling.”
However, dealers and jewellers felt the latest move is unlikely to curb the demand for gold in the long run and could encourage illegal imports.
The duty hike, which pushed up the price of gold by Rs 315 to Rs 31,250 per 10 gram in the national capital today, could be reviewed if the demand moderated in the months ahead. A hike has also been levied on platinum.
The decision is aimed at propping up the rupee, which remains wobbly because of high demand from crude oil and gold importers. The Indian currency lost six paise to end at 53.77 against the dollar today.
India is the world’s largest importer of gold followed by China. The country’s gold imports have risen to 969 tonnes in 2011 from 715 tonnes in 2006.
Officials said they expected gold imports to moderate by about 20-25 per cent because of the duty hike, “but this would take time… maybe over a quarter”.
Finance minister P. Chidambaram had told newspersons earlier this month that “the demand for gold must be moderated. We may be left with no choice but to make it a little more expensive to import gold. The matter is under government consideration.”
With only about a month to go for the budget, today’s move is expected to curb the appetite for gold during the ongoing Hindu marriage season.
In the last budget, India had doubled the import duty on gold to 4 per cent. The higher duty helped to check gold purchases, which were around $38 billion till December 2012. In 2010-11, India spent $56.5 billion on gold imports.
Huge imports of gold have ratcheted up the country’s current account deficit (CAD), or the difference between exports and imports, to $38.7 billion or 4.6 per cent of the GDP (gross domestic product) during the first half of the current fiscal. Economists consider any CAD above 2.5 per cent of GDP to be alarming.
Gold imports during April-September of the current fiscal stood at $20.25 billion. Had imports been half during this period, foreign exchange reserves could have increased by $10.5 billion against a small rise of $400 million, finance ministry officials said.
However, gold dealers are disappointed. Prithviraj Kothari, managing director of RiddiSiddhi Bullions Ltd, said, “The government’s move to hike the customs duty may lead to a rise in illegal channels.”
Consumers are also likely to feel the heat. Bablu De, president of the Swarna Shilpa Bachao Committee in Calcutta, said, “The immediate impact would be prices would go up by about Rs 600-650 per 10 gram. Retailers are expected to pass on the hike to consumers. This can marginally impact sales volume in the short run, but demand will be steady as gold offers easy liquidity and is considered a hedge against inflation. However, bulk demand may be affected.”
According to Pankaj Parekh of the Gems and Jewellery Export Promotion Council, small exporters who depend on loans will be worst-hit as they would have limited access to gold because of their low bank guarantee.
Link with ETFs
The government has also decided to link gold ETFs (exchange traded funds) with deposit schemes to increase the availability of physical gold in the local market. The move will enable mutual funds to unlock their physical gold and invest in gold-linked schemes offered by banks. Banks can on-lend this gold to jewellers.
“The advantage will be that a part of the gold lying idle in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade,” explained economic affairs secretary Arvind Mayaram.
Sebi will come out with the notifications soon.
The finance ministry also said banks could keep gold deposits for as short as six months against a minimum 3-year lock-in earlier.
“Today’s decision won’t turn all household gold into investible resources but it’s a start,” said Amit Mukherjee, who manages a Hong Kong-based private equity fund with focus on India.
Officials said the government planned more measures to wean households away from gold. Gold-backed pension and savings accounts are among those in the pipeline.
The government is contemplating removing gold jewellery from the list of items allowed to be imported under the India-Thailand free trade pact as several traders are misusing the provisions to bring the precious metal from the Southeast Asian nation, according to PTI.