Higher gold duty won't tame current account deficit: Nomura

Moneycontrol Bureau

Brokerage house Nomura is of the view that the move to hike import duty on gold will not help in moderating its import beyond a point.
India imported 891 metric tonnes of gold in 2011-12, and Nomura estimates the volume to dip to 855 metric tonnes this financial year, and 750-800 metric tonnes next financial year.
"However, we do not expect gold imports to fall much more than that as consumption demand for gold (around 65% of gold demand) and investment demand (around 35%) have already moderated close to their averages. Given Indias penchant for gold for weddings and other religious ceremonies, a sharp fall in volumes is unlikely, in our view," Nomura analysts and Aman Mohunta said in their note.
The duo are of the view that gold imports are not entirely responsible for the widening current account deficit.
"In FY13 (Apr-Sep), net exports of gold moderated to USD 9.1billion from USD 25.1 billion in FY12, yet the current account deficit is likely to widen to a new record of USD 90 billion or 4.9% of GDP in FY13. While gold imports have fallen, higher oil prices, weak exports, flagging invisibles balance and inelastic demand for imports of coal, fertiliser and other commodities have led to a sharp rise in India’s current account deficit," the Nomura note said
And while a recovery in exports could help contract the CAD slightly in 2013-14, it will still remain around 4.3 percent of GDP due to rising oil prices and domestic supply-side constraints leading to higher imports.
Besides, the higher duty will only encourage import of gold illegally say Varma and Mohunta.
"One of the reasons why households have a penchant for gold is that it has provided the best return among all financial instruments during a period of high inflation. Apart from high real returns, it is also the most liquid asset. Unless investors have options on other financial instruments, which provide an inflation hedge, we think import duties will only lead to a reduction in gold imports through the official channel and result in a simultaneous rise in gold imports through unofficial channels."