POLITICAL ECONOMY

Traders to lose heavily as India hikes gold import duties to 6%

The hike in gold import duty in India is set to help smugglers push the precious metal and increase the price of gold by $13 per ten gram in the domestic market.

Author: Shivom Seth
Posted: Monday , 21 Jan 2013

MUMBAI (Mineweb) - 

In what some fear will be a crippling blow, the Indian government has hiked the import duty on gold and platinum to 6% from 4% with immediate effect, in a move aimed at curbing imports of the precious metals and check the widening current account deficit.

India's passion for the yellow metal could dive by about 25% as a result of the import duty hike, according to the All India Gems and Jewellery Trade Federation's Bachhraj Bamalwa, who addedd the precious metal had put such a strain on finances that the government was left with no option but to hike the duty.

"The decision will boost smuggling and the parallel economy. The Indian government will lose heavily," he said.

On a day when gold climbed toward a one month high in the international market, rising to $1,689.87 an ounce, the Indian government has dealt a body blow to the Indian industry, said retailers.

The yellow metal’s price rose in the global market on hopes of the US announcing further stimulus measures. Silver, too, is expected to gain as it trades near a month’s high in the global market.
 
The Bombay Bullion Association has predicted that gold imports in the March quarter are expected to slow down to 100 tonnes against the 200 tonnes logged in the December quarter.

"It is not just a question of halving imports for the next quarter. The cost of a kilogram of gold will increase from $2,603.42 (Rs 140,000) to $3,719.17 (Rs 200,000). This will act as an incentive for many people to bring in smuggled gold," said an official.

Prithviraj Kothari of RiddiSiddhi Bullions said there would be a difference of 7% between the domestic and the international price of gold. This, he added, would have Indians bringing in more gold into the country while on their trips abroad.

"The government should harness the existing reserve of gold in our country. It is just targeting imports all the time,'' he added.

While investment demand for the precious metal is expected to fall immediately, gold consumption in the jewellery sector is expected to remain largely unaffected.

SOPS INCLUDED

As if doling out a sop, the Indian government has also decided to link the Gold Exchange Traded Fund (ETF) with the gold deposit scheme, which will enable mutual funds to unlock their physical gold and invest in gold linked schemes offered by banks.

The changes proposed to the gold deposit scheme are expected to make it attractive for individuals to deposit their idle gold with banks. India is the world's largest consumer and importer of gold.

However, outflow of the foreign exchange on gold imports has been impacting the country's current account deficit, which has widened to $38.7 billion or 4.6 per cent of the GDP during the first half of the current fiscal.

Gold imports in 2011-12 amounted to $56.5 billion. In the current financial year, till December, they are estimated at $38 billion. The hike in customs duty is also set to impact overall jewellery demand.

In a note, Geojit BNP Paribas Financial Services said that the country had managed to do away with gold smuggling, but with the higher duty structure, the phenomenon would reoccur and lead to unwarranted illegal activity.

Jewellers has also expressed concern that the duty hike would result in large scale smuggling.