New Delhi: Finance minister P. Chidambaram said on Wednesday the government may be forced to make gold imports costlier to restrict the ballooning current account deficit.
India’s current account deficit touched a record 5.4% of gross domestic product (GDP) in the second quarter of the fiscal, increasing the country’s vulnerability to external shocks in recent months. With gold constituting a substantial share of the country’s imports, the government has been looking at ways to curb demand.
“I may add that we may be left with no choice but to make it a little more expensive to import gold,” Chidambaram said. “This matter is under government’s consideration.”
Last year, the government first raised the duty on gold on 17 January to 2% of estimated value from Rs.300 per 10g.
Subsequently, in the budget, the government raised duties on gold to discourage imports.
While it doubled the customs duty on standard gold bars to 4%, the duty on non-standard gold bars was doubled to 10%.
But the higher gold duty has led to increased instances of smuggling, the government has acknowledged.
“Increasing import duty on gold is not a bad idea, but at the same time we need to look that it doesn’t result in smuggling of gold,” said C. Rangarajan, chairman of the Prime Minister’s economic advisory council.
Chidambaram appealed for moderation in demand to reduce imports. Of the total imports of $237.2 billion in the first half of this fiscal, gold constituted $20.25 billion.
The Reserve Bank of India (RBI) is also considering ways of curbing the rising demand for gold. An RBI working group set up for this purpose suggested tax incentives, dematerialization of gold and the introduction of products such as gold-accumulation plans, gold-linked accounts, and modified gold deposit and pension products.
In the 12 months ended September, India imported 793.1 tonnes of gold, down 28% from the same period a year ago, according to World Gold Council data.
The fall reflected cautious buying in the light of rising prices of the metal as well as a hike in import duties.
However, in the July-September quarter, demand showed a rise of 9% to 223.1 tonnes with the late monsoon rains in September encouraging gold buyers, but it was not sufficient to overcome the weakness in the first half of the year, World Gold Council added.
“There could be a substantial hike this time as the government seems really keen to curb gold imports,” said Nayan Pansare, an independent analyst who has worked with jewellery export houses. “I won’t be surprised to see a doubling of import duty. A hike to the level of 6-8% is possible.”
“In a knee-jerk reaction, there could be a reduction in imports of gold when the duty is hiked, but it could also open up the smuggling channel,” he added. Pansare said the duty hike could push imports down to 550-600 tonnes in 2013.
The finance minister expressed confidence that foreign inflows will be able to finance India’s current account deficit. With the current account deficit in the first half of the fiscal touching 4.6% of GDP, that for the full year is likely to exceed last year’s 4.2%. In a separate statement, revenue secretary Sumit Bose warned of punitive action against excise, customs and service tax evaders.
Sahil Makkar contributed to this story.