G. Srivatsava, Editor, Bullion Bulletin
Measures taken by the Indian government since Jan’12 have been only partially successful in bringing down gold imports. One cannot, therefore, rule out drastic measures in future.
The core issue:
High current account deficit (CAD) estimated at 4.7% of the GDP is the core concern for India. Main factors responsible for high CAD are high crude oil imports, high gold imports, declining inflows from services sector and portfolio investments.
Gold is the second largest item imported into India after crude oil. Gold imports increased from USD 40.6 Billion in 2010-11 (Apr-Mar) to USD 56.5 Billion in 2011-12 (source: commerce.nic.in). For Apr-Dec 2012-13, the imports are reported at USD 38.5 billion. While crude oil imports are considered essential for the growth of the economy, import of gold is perceived as a drain of precious foreign exchange. So, since Jan’12, the government has been pursuing several measures to restrict gold imports.
Till January 16, 2012, India levied import duty on gold on weight basis(specific duty), which worked out to about 1% of the value of gold. However, post-January 16, 2012 notification, duty on gold was linked to its price and was fixed at 2% of the value. On March 16, 2012, import duty was again hiked to 4% of the value. In January 2013, another 2% hike duty was imposed, making customs duty on gold presently at 6% of the value. Besides, there is a state levy (VAT) of 1% over and above the customs duty and a small cess. Thus, currently, Standard gold in India is costlier to the international gold by at least 7.5%. To arrive at the amount of duty payable, the central government declares a guidance value in USD per 10 gm, called ‘tariff value’ on which the duty is levied, twice a month. Separately, Government also notifies the official exchange rate for converting USD into Indian rupee, twice a month. Thus, effectively, four times a month the gold price need to be adjusted for changes in import duty.
RBI brought out a working paper on ways and means to reduce the dependence on physical import. Some of the suggestions proposed are restarting the gold deposit schemes of the bank with changed rules (such as reduction in the duration etc), launch of gold accumulation plan, launch of gold pension scheme, devising a way to utilise the 30 –odd tonnes of gold held under custody of gold ETFs, and lastly, an inflation-indexed bond as a substitute for investment in gold.