The Centre’s move to increase the import duty on gold by a steep 500 bps (base rate) to arrest the free fall of rupee may lead to strengthening of the grey market, analysts said.
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“The sudden hike in gold import duty has taken us by surprise,” said Ashish Pethe, Chairman, Gem & Jewellery Council (GJC). “We understand the government’s situation with regard to the rupee vs dollar, but this hike will put the entire industry in a spot and may encourage smuggling,” he added.
“We will engage with the government to resolve the situation in favour of the domestic industry,” Mr. Pethe said.
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He was reacting to the government’s move to increase import duty on gold from base rate of 7.5-12.5% to curb the sharp depreciation of the Indian rupee against dollar.
“India’s gold demand is largely met through imports, which, at times when the rupee faces some weakness, exacerbates the issue. Rupee exchange rate touched a record low earlier this week amid higher inflation and expanding trade imbalances,” said Somasundaram PR, Regional CEO, India at World Gold Council.
“However, the overall taxes on gold now rise sharply from 14% to about 18.45% and unless this is tactical and temporary, this will likely strengthen the grey market, with long-term adverse consequences for the gold market,” he added.
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The government has, however, exempted the social welfare surcharge.
“The step has been taken in an effort to curb imports, as the rupee slid to a record low. India had imported the most amount of gold in a decade last year as demand revived after the pandemic,” Naveen Mathur, director – Commodities and Currencies – Anand Rathi Shares and Stock Brokers, said in a note. “There has been a sudden surge in imports of gold,” he added.
“In May, a total of 107 tonnes of gold was imported compared with 11 tonnes in the same period last year and in June also the imports have been significant. The surge in gold imports is putting pressure on the current account deficit,” he said.