Hard-pressed to take urgent steps to curb gold imports feeding the current account deficit (CAD), the government on Monday hiked import duty on gold and platinum to 6% from 4% with immediate effect. The government also decided to allow mutual funds that provide gold exchange-traded funds (ETFs) to earn on the physical gold held by them. The funds will release a part of the gold held by them and deposit it with banks under the gold deposit scheme, and the latter would, in turn, release the gold to meet the requirements of the gems and jewellery industry.
Economic affairs secretary Arvind Mayaram said this would help reduce the demand for gold imports, but analysts warned that duty hike could increase smuggling. Currently, mutual funds do not earn any returns on the gold held by them under gold ETFs.
Also, the government has made the gold deposit scheme more attractive for individuals to deposit their idle gold with banks. The minimum quantity of gold that can be deposited with banks will be reduced and the minimum tenure of deposit will be cut to six months from the present stipulation of three years. As and when a customer seeks redemption, gold will be returned to them, Mayaram said, adding the entire exercise will not have any risks.
On Monday, gold traded at R30,935 per 10 grams. Following the import duty hike, gold prices went up by R315 to R31,250 per 10 grams in Delhi.
The duty changes (customs and excise) will be applicable on gold ore bars, gold ore and refined gold. “Duties will be reviewed after some time if there is a moderation in gold imports,” Mayaram said. The finance ministry has also asked all its customs field officials to keep a strict vigil on gold smuggling.
These measures were taken in consultation with Sebi and RBI and these two regulators will soon modify their guidelines reflecting the changes in norms. Banks will notify the changes in the gold deposit scheme.
The CAD had widened to an all-time high of 5.4% of GDP in July-September. Gold imports in April-December stood at $38 billion.
The decision to hike gold import duty earlier this fiscal seemed to have not had a big impact as gold imports stood at $10.46 billion in the second quarter, a fall of just $1 billion from the earlier quarter.
Owing to the sharp fall in exports and a rather small fall in imports, the trade deficit widened to $147.2 billion in the first nine months of the fiscal, up from $137.3 billion in the same period previous year.
Mayaram said it was difficult to immediately estimate the impact of these measures on CAD, but expressed confidence that gold imports will moderate.
Though the inflation indicator wholesale price index (WPI) had fallen to a three-year low in December 2012 to 7.18%, annual consumer price inflation was still high at 10.56% in December, up from 9.9% in November 2012. Owing to the high inflation, people prefer parking their money in gold, considered one of the safest assets and is thought to be the best hedge against inflation.
Dhirendra Kumar, CEO, Value Research India, told FE: “Currently, people are chasing gold as it is the best-performing class. These measures will result in Rs 15,000-20,000 crore invested in gold ETF not going out of the country. Right now, through ETF, the gold is bought and held in London. Due to these measures these funds will stop going out.”
However, he added: “The increase in import duty is unlikely to dampen the demand of gold. It will at the most will have short term impact.”