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The gold import duty hike: A last ditch effort to save  the economy’s declining reserves

 

Alarmed by the un-productivity of the rising gold assets in the country and its impact on the current account deficit* the RBI and Central Government further hike the import duty of gold from 4% to 6%. The Retail Jeweller Market Reports

 

“The parallel trading in gold will blunt the competitive edge of organized and ethical jewelers. The policy is retrograde and will negatively impact the market.”

 

Gold as a commodity does not add much to the productive capacity of the economy. Gold is either stashed in the lockers or gets converted into jewellery. In both the cases, money spent on purchasing gold gets blocked since gold is not a productive asset. The gold import is seen as one of the reasons for India’s high current account deficit.

 

Therefore, the Central Government and the Reserve Bank of India (RBI) have been working towards reducing the import of gold. Hiking import duty of gold from 4% to 6% is one definitive step towards that end. The current account deficit (CAD) had risen to $38.7 billion or 4.6 per cent of the GDP (gross domestic product) during the first half of the current fiscal. Of this, a major contribution was by way of gold imports, amounting to $20.25 billion.

 

The hike in import duty was on the horizon with P Chidambaram, Union Finance Minister stressing on the importance on moderating the demand for gold. “We may be left with no choice but to make it a little more expensive to import gold," says Chidambaram, indicating that increase in import duty was coming.  Through the 2% hike, his message was loud and clear: reduce gold's allure and head off Indians to other investments. For, too much gold is a drag on India's economy.

 

India’s gold imports have grown sharply, up nearly 50 per cent in 2011-2012 to an estimated $57.5bn. The import duty on gold was hiked from 1% to 4 % in last budget (2012-2013). However, with the alarming rise in the gold import, a further increase of additional 2 more percentage is being considered by government bodies.  

 

 

 

 
 
 
 
 
 

 
 
 
 

REASON FOR HIGHER GOLD IMPORT

The experts blame the higher gold import for the country’s deteriorating external balance. Why is gold import so high in India? Imports are high partly because of the large population of about 1.2 billion. Per capita gold consumption is only 0.7 grams, half that of the United States and one-third of the Middle East, according to World Gold Council (WGC) estimates.

 

Annual Rate of Gold Imports growth in the last three years was very high. In 2008-09 the growth was 23.0 percent, in 2009-10 it was 38.1 per cent and in 2010-11 the recorded growth stood at 18.3 per cent. Thus the average rate of growth during this period was 26.8 percent.  At this rate, the gold import bill will be approximately $100 billion by 2015-16.

 

According to a World Gold Council report, India has savings rate of approximately 30 percent, with 10 percent of this being in gold. It says that gold reserves in India, both with private and government, were around 20,000 tons at the end of 2011 and it is worth roughly Rs 54 lac crore, which is 60 percent of the nominal GDP of India in 2011-12. 

 
 
 
 

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