The finance ministry on Wednesday announced a hike in gold import duty to 8 percent from current 6 percent in order to curb extremely high demand for the yellow metal. The government also hiked platinum import duty to 8 percent from 6 percent.
This is the second hike in gold import duty since January. Gold import duty has been hiked to 8 percent from 2 percent in past two years. In the last two years import duty on gold has gone up almost eight fold compared to the Rs 300 per 10 grams that used to be before 2012.
In April, 2013, gold and silver imports surged by 138 percent to USD 7.5 billion, as against USD 3.1 billion a year ago. The World Gold Council (WGC) expects India's gold import to touch a record level at 300-400 tonne in April-June quarter.
Higher gold imports have been the key reason for the widening current account deficit which touched a record high 6.7 percent of GDP in the December quarter. The Finance Minister has been saying that the current account deficit and the rupee are very important to monitor at this point in time. The Financial Stability and Development Council (FSDC) discussed only on Monday that in May itself 262 tonnes of gold was imported. On an average about 700-800 tonnes gold is imported. Last year it was a 1000 tonnes and the finance ministry wants that to be moderated.
Also read: RBI curbs gold import, extends restrictions beyond banks
This has clearly rattled finance ministry. Even Reserve Bank of India (RBI) on Tuesday extended the restrictions on gold imports from banks to all other nominated agencies or star trading houses, which have been allowed by the government to import gold. At the same time, nominated banks and other agencies can import gold only on 100 percent cash basis, unlike using all letter of credit (LC) benefits. Any import of gold will now be allowed only for meeting exporters' need of gold jewellery, the RBI said in a statement.
On Tuesday, Raghuram Rajan the chief economic advisor to the government said that RBI’s move will put some sand in the wheels. However, sand in the wheels wasn’t enough and a road block needed to be put to stop that wheel of gold imports at this point.
The expectation for good Rabi crop may also push up gold demand going forward as the agricultural incomes will go up. However softness in Consumer price index (CPI) recently is a positive sign as when inflation softens the demand for gold goes down.
However, the government is not willing to wait at this point in time for medium to long-term measures. They wanted action now and now they will hope that the sharp hike of gold of 138 percent in April itself will not be repeated and gold demand will taper out.
Will this move encourage smuggling of gold
It must be noted after the Budget the government had avoided to increase gold import duty with argument that it may lead to smuggling. Now between the increasing current account deficit and smuggling of gold the government seems to have chosen former as a more important issue it needs to handle. Off course there are other ways to deal with smuggling of gold such as making monitoring and prosecution of smugglers more intense.