Govt to Hike Import Duty On Gold To Tame CAD

Gold, this simple word brings a sparkle to the minds of every Indian. But the bitter truth about it is that the fascination for this yellow metal is making the economy a little bit uncomfortable. Look at how the prices of this precious metal have touched an all time high in the last calendar year owing to rising demand in the country. The situation had been further aggravated due to a rapidly depreciating rupee. At present, gold is trading above the Rs 30K mark per 10 gram mark. This rise in the price of the metal, coupled with higher imports following a higher demand have indeed added to the pressures on the deficit front raising many eyebrows in the ministry of Finance.

The metal which was the third most imported item in the year 2000 has now become the second most imported item after crude oil. In a recent development, the government has said that they are considering the hiking of taxes on gold imports in a bid to stifle imports and in turn tame the current account deficit (CAD).

At present the CAD stands at an all-time high of USD 22.4 billion (for the July-September quarter) which is equivalent to 5.4% of the GDP. This is up from 4.2% during the same period last year. A higher CAD may result in government borrowing going up and weakening the rupee further. Gold imports rose 9% to 223.1 tonnes in the September quarter, after a 56% fall in the June quarter to 131 tonnes. The December quarter may also see higher imports thanks to the festive season.

Worried by the ballooning deficit, the government in March doubled the import duty on gold to 4%. Gold is the biggest item on the import bill after crude oil and is easier to tame than energy supplies. It is believed that if the government levies this duty on the commodity it will tame gold imports which will help to contain the CAD to some extent and will protect the foreign-exchange reserves outflow. The second side of the coin is that, the rise in the duty will be passed on to consumers immediately which will see gold prices rising further and make it dearer to own. Will the government hike duties as it proposes to do? Whatever be the outcome, remember, gold after all is a commodity which is not much in circulation. It remains where it is bought. So the release of liquidity into the system will not happen in any case.