Duty On Gold Import Hiked Again, Will It Help?

A staggering decline in the value of rupee versus the dollar has sent tremors across the domestic financial world as the RBI can do little to tame the hawkish dollar. In its quest to give some support to the INR and balancing the ever increasing CAD, the finance ministry has hiked the gold import duty yet again on Wednesday (June 5, 2013) from 6% to 8%. 

Interestingly, this is the second time that the duty on the yellow metal has been hiked in the last 6 months. Though it will certainly have a bullish impact on the price of gold in the domestic market, experts feel that it is too small a prescription for a bigger ailment called CAD. 

The government move came in light of the fact that India imported more than 160 tonnes of gold in May 2013, owing to softening in the prices of the precious metal. During the last 2 months, India’s import peaked at USD 15 billion. In January also the government had raised the gold import duty from 4% to 6% as the CAD for the third quarter of FY13 has touched an all time high at 6.7%. The question now is whether this hike would serve any purpose?

Experts are quite pessimistic about the impact of this on the overall economy. “As we look at the global platform and ultra offensive economic policies of countries like Japan and US, the government’s move to raise duty seems somewhat futile. Also, as an appreciating dollar is putting tremendous pressure on the Indian economy, foreign inflows are a must for the country. Today, the FDI and FII inflow is not a choice but a compulsion,” commented Jaganndham Thunuguntla, Head - Research, SMC Global. 

Also, as the rupee is declining, crude oil import bill is bound to swell in rupee term, thereby further impacting the financials of the country. In such a situation, it is inevitable for India to somehow increase its cash inflow rather than focusing on containing outflows.

The government’s move has come in light of the Finance Minister’s recent remark on curbing gold import - the second biggest import after crude oil. Recently, the RBI has also put restrictions on the import of gold by financial institutions and banks. Also, it has limited the amounts of loans given by banks and companies against gold and restricted the import on consignment basis by nominated agencies to genuine customers only. The government is also looking at banning gold coin sale by banks.