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Govt hikes duty on gold imports to arrest widening trade deficit, falling rupee
- Amid concerns of widening the current account deficit, the rupee fell to its lowest ever level of 78.97 against the US greenback. The rupee has depreciated by more than 5% against the dollar so far this year to hit record low despite frequent interventions by the central bank
NEW DELHI: The Union government on Friday raised effective import duty on gold to 15% from 10.75% to arrest the fall in Indian rupee which hit its lowest level ever against the US dollar amid a sudden sharp rise in imports and widening current account deficit.
India’s trade deficit galloped to an all-time high of $24.69 billion in May following a surge in gold imports along with an already-high energy import bill. India imported 107 tonnes of yellow metal in May.
“The surge in imports even in May was concerning. In June, gold imports are even higher. It was putting pressure on the current account deficit. Therefore, we have decided to hike import duty on gold,” said a government official.
The official said the government was not looking at this as a revenue boosting measure, and aims to garner only ₹500-1,000 crore from gold import duty hike and export duty on petrol, diesel, ATF and cess on crude domestic production.
Amid concerns of widening the current account deficit (CAD), the rupee fell to its lowest ever level of 78.97 against the US greenback. The rupee has depreciated by more than 5% against the dollar so far this year to hit a record low despite frequent interventions by the central bank.
RBI interventions have led to a significant depletion in foreign exchange reserves. Since 25 February, reserves have declined by $40.94 billion to settle at around $590 billion. Experts are of the view that the rupee could weaken to 80 to the dollar over the next few weeks.
Data released by the central bank showed that India’s current account deficit expanded to $38.7 billion, or 1.2% of GDP, in FY22 from a surplus of $24 billion, or 0.9% of GDP, in FY21 as the trade deficit surged.
“For FY23, the trade deficit is likely to expand further amidst a pickup in economic activity as well as higher commodity prices, pushing CAD higher. We estimate CAD at 3% of GDP or US$100bn,” said Aditi Gupta, economist at Bank of Baroda in a report last week.
“FPIs have remained net sellers in the domestic market for the past 8-months, which will pull overall capital account surplus lower. At the present run rate of US$ 5bn per month, FPI outflows in FY23 can surge to US$ 60bn in FY23, putting further pressure on India’s BoP,” added Gupta.
However, investor sentiment might revive in the latter part of the year. In such a case, FPI outflows may be limited to $30 billion to $40 billion in FY23, she said.
“Now the effective duty on 1 kg of gold will be around ₹6.88 lakh. Since the duty has surged this will lead to more smuggling from nearby countries. This has been historically seen that smuggling from Bangladesh and Nepal surges whenever India tries to curb gold imports,” expert and former All Indian Gems & Jewellery Federation Chairman Bachhraj Bamalwa said.
He said consumption of the precious metal and gold imports have never been affected because of the duty. Gold prices will rise and the purchasing power of people will decline, he added.
“In 2011 the import duty was 1%, it has risen to 15% today but it has never affected imports. Yes, the government’s revenue would go up,” Bamalwa added.
Economists expect the rupee to touch 81 against the US dollar by the end of the year. India has seen a sharp acceleration in FPI outflows in recent months.
“The government has increased customs duty rate for import of gold bars from current rates of 6.9%/ 7.5% to 11.85%/ 12.5%, while exempting the levy of social welfare surcharge thereof. This change will slightly reduce the outflow on account of gold imports, and help provide stability to the INR to USD ratio,” Abhishek Jain, Partner Indirect Tax, KPMG in India, said.
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Business NewsEconomyGovt hikes duty on gold imports to arrest widening trade deficit, falling rupee
First Published:1 Jul 2022, 01:32 PM IST
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