Editorial: Good job on gold

By: |
December 2, 2014 3:15 AM

Now to start reducing those import duties

After months of suspense during which RBI was discussing further curbs on gold imports, the government did well to do away with the 80:20 curbs last week. As FE has pointed out before, the curbs, including the hiking of import duties, served no purpose. While India hiked duties from 4% in February 2012 all the way up to 8% in June 2013—in steps of 2% each—gold demand rose from 202 tonnes in Q1-2012 to 310 tonnes in Q2-2013 since the rise in global gold prices made the investment worth it despite the hike in import duties. Once gold prices started falling globally, a response to faster US GDP growth and the declining taper essentially, Indian demand also slowed—investment demand for gold, measured by the demand for gold bars and coins, has fallen from 64 tonnes in Q1-2012 to 42 tonnes in Q3-2014. Hiking import duties and putting in artificial curbs like the 80:20 rule only hiked the premium on gold prices in India, and even fuelled demand to beat what always looked like another impending import curb. With gold import curbs gone, news reports suggest de-hoarding of gold stocks is taking place. A 10% import duty, in this context, means that those who had bought gold before the duty hike spiral began in 2012 are getting a 10% premium over what they should normally have got. Take that away, and watch the price fall even more.

Despite the fall, however, India’s imports of gold are still very large at 639 tonnes in the last 12 months, and does cause a problem with the overall import burden. Crushing this demand, however, is no solution. Indian households traditionally buy gold for a variety of reasons; two important ones are the lack of know-your-customer (KYC) norms and the lack of viable investment options. With inflation running above even fixed deposit rates, where else were households expected to invest? Had the government come out with enough CPI-indexed inflation bonds for the retail sector, possibly the demand for gold would have fallen even earlier. Though Kisan Vikas Patras have been reviled as a hoard for black money, their easy KYC was certainly a factor in their popularity—to that extent, bringing them back is probably a good thing.

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