Hiking import duty on gold not a solution

The Central Government and the Reserve Bank of India (RBI) have, in the last week, been indicating measures in the offing that will help reduce the import of gold as it is seen as one of the reasons for India’s high current account deficit.

An increase from the prevailing 4 per cent import duty on gold is being considered and the RBI has recommended restrictions on value and volume of gold imports.

But increasing the import duty on gold will not solve the problem, felt C. Vinod Hayagriv, Managing Director, C. Krishniah Chetty & Sons, and immediate past Chairman, The All-India Gems and Jewellery Trade Federation.

“Instead, it will create a new monster like smuggling and the hawala trade. These were effectively dealt with in the past, and today the jewellery industry is looking to get increasingly organised,” he said.

While a large current account deficit is unsustainable and needs to be checked, there are a number of factors which influence the current account deficit in India, according to Amresh Acharya, Director-Investments, World Gold Council-India.

“Buying less gold — and placing heavy duties on gold imports and jewellery purchasing — will affect the gem and jewellery industry. Gold is a protector of assets, an important attribute during economic uncertainty when wealth preservation is paramount. It also has a key role to play in hedging against currency risk and inflation, both prevalent economic issues facing India today,” Mr. Acharya said.

Kishore Narne, Associate Director, Head-Commodity & Currency, Motilal Oswal Commodity Broker, said “gold demand especially is largely price inelastic, so just by making gold little expensive through raising import duty would not curb demand.’’

It is widely felt that the focus should be on measures to reduce the impact of gold imports on current account rather than curbing imports. “The RBI has been proposing monetisation of the idle gold reserves in the hands of large population. Some of the measures like utilising the gold lying with the Exchange Traded Funds (ETFs) and setting up of Bullion Corporation may work well in addressing this crisis,” Mr. Narne said.

“Unless any decision takes into account the role that gold plays as an investment option, and also the cultural connection that Indians have always had with gold, any attempt to check gold imports is likely to be counter-productive,” said Mr. Acharya.

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