Taking on gold imports

Updated - November 16, 2021 10:33 pm IST

Published - January 24, 2013 02:24 am IST

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.

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