The rupee plunge has prompted the government to step up its scrutiny of “high-value and relatively non-essential imports” such as those of gold and certain electronic items to gauge their debilitating impact on trade and current account balance, a senior official told FE. A weak rupee has dashed any hope of a cut in the import duty on gold from the current 10% despite demand from several quarters, the official confirmed. Only last month, a NITI Aayog panel under Ratan P Watal had suggested that the import duty and the goods and services tax (GST) on gold be trimmed to “as low as possible” to discourage smuggling and improve tax compliance.
Currently, the GST on gold stands at 3%. The bullion industry has also been demanding that the government cut these taxes.The rupee settled at a fresh low of 72.70 a dollar on Tuesday, down 25 paise from Monday’s close. A sudden spurt in gold imports in August has added to the government’s discomfort. Latest GFMS data suggest import volume of the precious metal shot up by a staggering 117% in August from a year earlier, as jewellers start to replenish stocks to cater for upcoming festive season demand. Between April and July, though, gold import value had dropped 14.7% from a year earlier to $11.41 billion, according to the official data.
Electronics imports, too, went up by 12.2% between April and July to $18.46 billion, while exports of these items stood at only $2.34 billion, leaving a trade imbalance of $16.12 billion in this segment. Overall, merchandise trade deficit, a key driver of the current account deficit (CAD), touched a 62-month high of $18 billion in July. Between April and July, the trade deficit touched as much as $63 billion.
“We have already raised the scrutiny of gold imports to check any potential misuse of our free trade agreements (FTAs) with countries like Indonesia by suppliers from other countries to push gold at zero duty into this country,” he said. There are apprehensions that such unscrupulous elements may be illegally tweaking the place of origin of the precious metal and, consequently, gold from other countries may be landing up in India as imported from India’s FTA partners. In recent years, the government had to curb gold purchases from FTA partners like South Korea that didn’t produce gold and yet had become an exporter of the precious metal to this country.
“As for electronic imports, while some of these items are essential, some are not. We have to identify them and see how best to discourage their imports,” he added. Some analysts have forecast India’s CAD to worsen to 2.5% of GDP or more this fiscal, against 1.9% a year before, thanks to elevated global oil prices that have inflated the country’s import bill. Already, CAD touched 2.4% of GDP in the June quarter. High CAD is bound to exert further pressure on the rupee at a time when the domestic currency has been flirting with all-time-lows against the dollar day after day.
The threat to the rupee comes from a range of factors. Rising US interest rates have already driven out significant foreign money from the bond markets. Worsening relations between the US and Turkey, the American sanctions on Iran, elevated oil prices and the trade war between the US and China have discouraged capital inflows into emerging economies like India and weighing on their currencies. Uncertainties surrounding the 2019 elections add to the problems.