In a desperate move to restrict imports of gold, the Indian Government and Reserve Bank of India (RBI) are planning to further increase import duty on gold from prevailing 4% to 6%. It had quadrupled the gold import duty from 1% to 4% last year and now the same has been proposed to be increased to 6% very soon.
The government wants to initiate this move to curb the ever increasing current account deficit due to weakening of rupee and deteriorating economic conditions. India's current account deficit went up to 4.2% of GDP during fiscal year 2011/12. The Indian rupee was one of the world's weakest currencies and continued dropping against the US dollar and other major currencies. At the same time, India’s gold imports climbed by roughly 40% in comparison with the previous year, reaching a financial value of nearly US$62 billion.
In fact, the measures so far taken have had a very negligible impact on Indian demand for physical gold. According to the RBI, India's gold imports account for approximately 80% of its current account deficit. As a result, the Supreme bank has once again decided to tight screws. It would be worthy to note here that India's commercial banks were barred last month from granting credit for gold purchases.
But the proposed move by the government has evoked a strong opposition within the industry circles. Gold dealers here feel that the country’s gold market which is the second largest in the world is being unfairly targeted in response to the weak rupee and the large current account deficit. The government needs to consider many other factors which influence the current account deficit by introducing stringent measures and regulate them. “Placing heavy duties on gold imports and jewellery purchasing will not only affect the growth of gem and jewellery industry but instead it would create a new monster in form of smuggling and the hawala racket. Gold is a defender of assets and considered to be an important feature during economic uncertainty when wealth conservation is supreme. It also plays an important role in hedging against currency risk and inflation, both of these are prevalent economic issues in India today,” they argue.
Mr. Kishore Narne, Associate Director and Head of Commodity & Currency M/s. Motilal Oswal Commodity Broker, says “Increasing the import duty on gold will not solve government’s problem of narrowing current account deficit. The gold demand is basically price inelastic, so just by making the gold little more expensive will not curb its demand.’’
“The RBI in past on several occasions has proposed monetization of the idle gold reserves (about 25,000 tonnes) which has been lying in the hands of large Indian population. The government should initiate measures like utilizing the gold lying with the Exchange Traded Funds (ETFs) and consider option of setting up of Bullion Corporation to effectively address the issue,” Mr. Narne said.
There are many jewellery traders in India who fear that increased duties mean that they would start losing out to other Asian competitor countries like the United Arab Emirates, Turkey and China. Contrary to India, gold trade policies in these countries are quite liberal and the governments there encourage their people to buy gold.
So, is the Indian government ‘killing’ the country’s jewellery industry by its misguided policies? Jewellers and gold dealers here feel so. They suggest that instead of imposing higher duties, the government should execute a full throwback to the ’70s to curb the gold appetite of people. It would also have to concentrate on curbing the correlated smuggling operations.
