Last Updated : 07 January 2013 at 12:30 IST
The India government is reportedly considering raising the import duty of gold by 1% so that, in effect, the imports would be dearer by 5%. The government, as well as the RBI in a recent report, holds the view that gold imports are adding to India's Current Account Deficit threatening the external balance and stability.
India runs a current account deficit mostly due to its import dependency on two key commodities: black gold or crude oil and gold. The former it cannot avoid importing, but the latter it can, if it is ready to rival a culture etched in and of gold.
“I am not happy with the way Indian Government has handled the Current Account Deficit issue. Increasing duties on Gold is not the only way to curb its imports and in turn reduce the deficit. To some extent imports will be affected but I fear it will result in encouragement of other illegal channels of getting gold in India.” said Mukesh Kothari, Director Riddisiddhi Bullions Limited in an e-mail response.
RSBL is one of the biggest importers of gold in India.
“I feel importers will try to bypass the additional duties by getting gold into the country through illegal channels instead or else start off with the fresh new rates. It all depends on how the market accepts.” he added.
When asked if the demand here would be curbed as gold gets to be dearer, he responded, “if they raise the duty there can be short term and long term implications. For short term, it is likely Gold demand can fall, as Indian customers adjust to new rates.” he said.
“On a longer term note, gold is deeply connected to our Indian culture. Its allure and safe haven appeal isn’t something that will simply disappear, just because our Indian government is looking forward to raise the import duties so as to cover the deficit. To add on, even if the Indian gold demand cools off substantially from its recent record pace, it will likely drive the broader price of gold to reduce as it imports so much.” he explained.
Meanwhile Motilal Oswal a commodity brokerage feels nothing unusual about the government's potential-but-not-sure decision.
“The is quite natural for the government and the RBI to worry on gold imports as they have contributed to nearly 30% of our total trade deficit in the last financial year. So the government is looking for ways and means to reduce the demand of gold.” according to Kishore Narne, Associate Director Head - Commodity & Currency Motilal Oswal.
“In our view simply by raising import duty or putting quantitative restrictions would not solve the problem but prompt newer problems like increased smuggling activity. And gold demand especially is largely price inelastic, so just by making gold little expensive through rising import duty would not curb the demand.” he added.
“So the regulators and the government has started to think in the lines of reducing the impact of gold imports on our CAD rather than curbing gold demand. As a part of doing so, they have come up with current recommendations to look for ways to reduce imports rather than curbing demand.” he observed.
“The RBI has been proposing monetization of the idle gold reserves in the hands of large population and present the ways to generate some returns on the gold holdings could unlock this huge inventory of gold and help reduce our imports to address the demand. Some of the measures like, utilizing the gold lying with the ETFs and setting up of Bullion corporation may work really good in addressing this crisis.” he added.
However, Rajendra Krishna Bhat of Bhima Jewellery, Kerala, feels that a hike of 1% on gold imports is not going to make a big impact.
“These days, price fluctuations in the commodity markets are reflected in gold jewellery trade in India on a greater scale and that degree is often bigger than the change in prices as and when such a duty hike is implemented.” he said.
“The jewellery demand is seasonal and I don't see chance of demand destruction.” he concluded.
But the CAD or Current Account Deficit is a menacing issue for India that could affect the Indian economy in a negative way, feels economists.
“The CAD as currently run by India is dangerous and unsustainable.” Vijayakumar, an academician and Investment Strategist at Geojit BNP Paribas, India.
When China is encouraging gold imports in a bid to improve the resilience of its economy, why should India back off; especially when Chinese consider gold as a strategic commodity? He replied that the case was not comparable.
“ China has $2.3 trn in forex reserves and runs a fiscal and current account surplus. This is not the case with India.” he said.
The RBI report acknowledges that gold in India is more than simply an asset.
Most Indians could never think of a marriage with gold not being present in the occasion. Can we hear the heart beats of a middle-class family getting a bit louder as gold prices climb?
“I think, these days in marriages, the bride's family does not commit to a particular amount of gold for bride as ornament. They would say they are ready to give their daughter gold of so and so amount. No body is committing beyond that.” said a recent bride who is now a wife and living a happy life even as the said formula worked out in her favour.
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