Govt plans gold import duty hike to trim CAD

Written by fe Bureau | New Delhi | Updated: Jan 3 2013, 06:40am hrs
As the current account deficit (CAD) hit a record 4.6% in the first half of the fiscal, a concerned government decided to clamp down on massive inflows of gold by raising the import duty on the "idle asset" for a third time in one year.

"As would be evident, gold imports constituted a substantial chunk of the imports and is a huge drain on the current account. Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion. I would, therefore, appeal to the people to moderate the demand for gold, which leads to large imports of gold. I may add that we may be left with no choice but to make it a little more expensive to import gold. This matter is under the governments consideration," Chidambaram said on Wednesday.

"I am confident that even if the year ends with a slightly larger CAD than last year, we would be able to finance the CAD without drawing upon reserves," he added.

Prime Minister Economic Advisory Council chairman C Rangarajan also said: "One of the approaches (to curb the CAD) is to to look at increasing the import duty on gold."

The plan to hike the import duty again from the current 4%, which has effectively been raised four fold since last January, reflects the government's growing uneasiness over large imports of an idle commodity- unlike crude oil worsening its current account, which comprises the balance of trade, net factor income such as interest and dividends and net transfer payments.

Although gold imports by Indiathe world's biggest consumerdropped 30% in the first half of the fiscal to $20.2 billion, it was still more than what the country had bought from overseas during the entire 2007-08 fiscal and slightly lower than $20.7 billion in 2008-09.

Moreover, encouraged by the drop in the metal's imports following the duty increase, the government hopes another round of hike would put a check on purchases, especially when a slowing economy is dragging down exports.

The move is also significant as gold demand has started recovering since July after two successive quarters of a slowdown, thanks to the late revival of monsoon that raised rural income prospects, and restocking by traders and jewellers ahead of the festive and wedding season, according to the World Gold Council (WGC).

Indian gold demand surged 9% in the July-september period defying an 11% drop globally, in volume terms. Adding to policymakers' concerns, the WGC has forecast a rise in Indian gold demand in 2013 after a 25% fall in 2012 to 800 tonnes.

Last month, the WGC had also said the Indian consumers seemed to have adjusted to the rise in gold prices, following a sharp depreciation in the rupee and the hike in the import duty.

The country's trade deficit widened to a 17-year high of nearly $21 billion in the quarter through September, as exports tumbled by 12.2% while imports declined only 4.8%. Consequently, the CAD hit a record 5.4% of the country's gross domestic product (GDP) in the quarter through September, despite a sharp rise in foreign investments, driving up the deficit to a record 4.6% of the GDP, or $38.7 billion, in the first half of this fiscal.

Worse still, while exports dropped 1.6% in October and 7.4% in November, imports rose 7.4% and 6.4%, respectively, during this period, which would impact the CAD in the third quarter.

"In a country where the use of gold is deeply entrenched in traditions and the culture, and where 5 million weddings happen annually, increasing the import duty won't serve the purpose.

Gold imports dropped in the first half of this fiscal as prices were high following a 15% rupee depreciation and as high inflation hit rural people's purchase power, and not just because of the duty hike," said Prithviraj Kothari, managing director of Riddhi Siddhi Bullion.