The hike in Customs duty on gold imports by 2 percentage points to 6 per cent was entirely expected, although a similar hike in the case of platinum imports was not. In the government’s view, higher gold prices might drive some traditional gold users to its likely substitute. Indeed, the Finance Minister had more than once hinted at a hike in tariffs for the yellow metal; the only question was the timing. Along with the imports of petroleum and edible oils, the purchase of gold from abroad has contributed to a widening trade imbalance and, consequently, to a clearly unsustainable current account deficit (CAD). During the second quarter of this year (July-September 2012-13), the CAD had widened to a record 5.4 per cent of GDP, well above official projections. The insatiable appetite for gold has cost the country dear: in value terms, gold imports nearly doubled from $29.9 billion in 2008-09 to $56.5 billion in 2011-12. Most of such imports have been inelastic and the government is only too aware that higher tariff might drive the gold trade underground. Besides, there is the genuine concern about India’s booming jewellery industry, which relies heavily on gold imports. Yet the macroeconomic dimensions are such that the government has been forced to take the tariff route to check demand. Simultaneously, it has done well to initiate a few steps to increase the domestic supply of gold for productive purposes.
The gold deposit scheme is being given a face-lift so that it can lure more investors. Introduced in 1999, the scheme has not exactly been a roaring success. Operated by a few banks, it allows investors to trade in a minimum of 200 grams of gold for a gold certificate which will be redeemable after 3 to 5 years either as gold or cash. Banks pay a nominal interest that is tax free in the hands of the investor. Such concessions notwithstanding, the scheme has been a failure: very few investors want to surrender their gold stock, especially when it is in the form of inherited jewellery, which has a sentimental value to them. Even with the new incentives announced — a lower lock in period for instance — it is very doubtful that this trend will be reversed. This is where the second policy announcement permitting gold exchange traded funds to deposit a portion of their gold holdings with banks assumes significance. These measures are small steps towards harnessing idle gold holdings for productive purposes. Many more innovative schemes such as gold-backed deposit schemes will be necessary. Over the medium term, however, unless inflation is checked, it will be unrealistic to expect a significant fall in gold demand.
Keywords: gold import, current account deficit, import duty hike, gold demand
Finanace Minister's attitude of taxing anything and everything without any justification is wrong and uncalled for. Tax returns are not going to absolve UPA government of its mismanagement of India's economy
We already know there will be a demand as we require it as jewellery. And as the price is increasing, the money on selling the gold in which we have invested is also high and no losses for the individual in the long run. that is what makes gold so attractive to everyone. the government must make other forms of investment as attractive as investing in gold even if kept in the form of heirloom. then a part of the peoblem will be solved.
Banks and other financial institutes should be asked by Government not
issue loans on gold.This will deter people from investing in gold
because of poor liquidity.As of now people think that they can pledge
gold in case of any emergency.
Government should act in a way to keep the import duty on gold low, to
avoid underground trade of gold. Instead, imposing higher duties on
alcohol, tobacco etc. will help compensating for this revenue loss.
There is no need of this hike in tax on gold import. People will still buy gold and as long as demand is there smugglers will supply it or people go overseas for gold purchase. Govt is creating avenue for them to generate profit. Loss for the people and the economy. Instead govt could have taxed the gold on jewellery (on finished ornaments) to curb sales. Let the gold come into the country freely. If there is reduced retail sales of jewellery import will automatically reduce.
Observations in the edit are correct. We need to re-examine why the Gold
deposit Scheme is not attracting as many investors as was expected. One
possible reason is that a large number of gold buyers are small
investors and very few investors can afford buy 200 grams of gold at a
time, as required in the deposit scheme. (2) If gold imports continue
unabated at present levels, the Finance ministry should not hesitate to
increase the import duty further.
The authorities may consider permitting realtors and mutual fund industry to tie up
with banks to enable subscribers to invest their gold holdongs and getting funding at
an economic rate of interest.there is tremendous scope to tap into this source for the
sentimentality attached to gold may yield in faviur of owning a house or making
investments.the scheme can be fine tuned by the regulators after ascertaining the
perspective of the gold holders/hoarders.enhancing the tariffs for import will only
cultivate the old bogey of masthans et al.innovate around sentimentality of
bharatiyas.that is the key.not ignoring it.
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