High duty failed to curb Indian gold imports

Siddharth Tak/ Zee Research Group

Finance Minister P Chidambaram has recently requested Indian citizens to resist the temptation of buying gold in order to improve the fundamentals of the Indian economy. The request should be taken seriously as it seems that Indian government has failed to curb the gold imports despite raising the import duty on gold four times in the last 18 months. While the import duty on gold has been raised from the levels of 2 per cent (prevailing on January 17, 2012) to 8 per cent on June 5, 2013, gold imports have risen by three and a half times in the corresponding six quarters. The higher gold and oil imports were also responsible for a record high current account deficit (CAD) figure in 2012-13. In FY13, CAD settled at 4.8 per cent of GDP after peaking to 6.7 per cent in the third quarter of the last fiscal (Q3FY13). In absolute terms, the deficit climbed to 87.8 billion dollars in FY13. A Zee Research Group (ZRG) analysis reveals that India’s gold import has increased on quarterly basis in the last six quarters (barring Q4FY13). Gold imports were 95 tonnes in January-March quarter of 2012 and at the end of same quarter import duty on gold was raised from 2 per cent to 4 percent on March 17, 2012. Unaffected by the move, gold imports climbed by 61 per cent to 153 tonnes in Q1FY13 (April-June quarter of 2012) on quarterly basis. The trend continued in July-September quarter of 2012 when gold imports jumped by nearly 46 per cent to 223.1 tonnes. Similarly in the next quarter (October-December of 2012) gold imports climbed to 255 tonnes which was 15 per cent higher than the corresponding figure in the previous quarter. This year in January, government increased import duty from 4 per cent to 6 percent and surprisingly gold imports dipped marginally by 15.7 percent to 215 tonnes in January-March quarter (Q4FY13). However, in April-June quarter of 2013 (Q1FY14), total gold imports once again jumped to 336 tonnes. This figure was 56 per cent higher than the figure reported in the previous quarter. Interestingly, a major chunk of the gold was imported in April (142 tonnes) and May (162 tonnes). In June 2013, gold imports were down by 81 per cent to 31.5 tonnes on monthly basis after the government increased import duty to 8 percent. Agreeing with the hypothesis, Madan Sabnavis, chief economist at CARE Ratings opined, “If the government wants to reduce the gold imports in the country then either it should ban gold import or apply quota system for acquiring it. Unfortunately, they are not willing to do the same. To ban sale of gold coins by banks and jewellers is not the right way to curb gold imports in the country.” More steps will be required to check gold imports. Manoj Kumar Jain, President, Commodities and Forex at IndiaNivesh Commodities, asserted, “Earlier government has not taken the right steps to curb the gold imports in the country but as of now government is thinking of more steps to rein in the surge in gold imports.”