Stemming rupee fall: With import duty at 10%, gold may turn rare metal in India

NEW DELHI/KOLKATA: India, the world’s biggest consumer of gold, raised import duties for the third time in 2013 to curtail the current account deficit and stem volatility in the rupee.
The government has increased the customs duty to 10% from 8% on the yellow metal, a move that helped the rupee edge up against the dollar but will make the commodity costlier by about Rs 600 per gram.
Customs duty on platinum has been raised to 10% from 8%, and on silver to 10% from 6%. The government also raised the excise dutyon gold and silver bars.
These appeared, at least for the moment, to assuage traders in the foreign exchangemarket. The rupee erased its morning losses to end at 61.19/20 against the dollar, a gain of eight paise from Monday. The Indian currency has lost nearly 12% since May.
“The basic purpose of enhancing the duty was to curb the import of gold,” Revenue Secretary Sumit Bose told reporters.
The higher taxes on precious metals would fetch the exchequer an additional Rs 4,830 crore.
The increase in import duties on precious metals is part of a series of steps announced by Finance Minister P Chidambaram on Monday to restrict the current account deficit to 3.7% of GDP and ensure its “full and safe financing”.
Chidambaram on Monday said the government’s plan is to restrict gold imports to 850 tonnes in the current financial year, compared with 950 tonnes in 2012-13. Gold imports stood at about 335 tonnes in the April-June quarter.
“This is as much a red line as the fiscal deficit. We will do all to ensure that it is not breached. The current account deficit will be contained and fully and safely financed,” he had said, unveiling his plan to contain CAD.
On Tuesday, Bose said the government was still working on the plan to hike import duties on non-essential goods.
However, some analysts were not impressed.
Move to Fuel Grey Market: Traders
“We think this piecemeal and stop-gap approach to addressing a real problem risks backfiring as it undermines investors’ confidence. We expect balance of payments pressures to persist and remain negative on India’s economic outlook over the next 6-9 months due to deteriorating domestic growth prospects,” said Nomura economist Sonal Varma in a note. Bullion traders said the move would fuel the grey market.
“This will give a fillip to the grey market in the country. Unofficial gold will be available at a lesser price than official gold,” said Haresh Soni, chairman, All India Gems & Jewellery Trade Federation.
“The move will only push up the premium in the market and make gold costlier for consumers. The fresh import duty will increase the price of gold by Rs 50,000 per kg,” said Prithviraj Kothari, chairman of Riddi Siddhi Bullion and a member of Bombay Bullion Association.
But the government said it was geared up to tackle smuggling.
In a written reply to a question in the Rajya Sabha, Minister of State for Finance JD Seelam said there is apprehension that the duty hike could lead to an increase in smuggling of gold or gold jewellery, and customs and other agencies have been asked to keep vigil.
During April-July, 294 kg of gold valued at Rs 75 crore was seized by the customs department. Seelam said in 2012-13, there were 879 cases involving gold valued at Rs 104 crore as against 506 cases and seizure worth Rs 49 crore in 2011-12.
Source: Economic Times

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