The Hindu Business Line : Rs 800-1,000 cr revenue from gold customs duty

Mumbai, July 6 For the Finance Minister who has found himself in an unenviable position of having to raise substantial revenue to fund social development programmes, the decision to hike customs duty on gold imports must have come without a second thought. Customs duty on gold import has been doubled from Rs 100/10 grams to Rs 200/10 grams.

The hike is fully justified simply because open market price of the yellow metal has nearly tripled in the last four years – from around Rs 5,500/10 grams to the current level of about Rs 14,500/10 grams. Indeed, in some sense, the Finance Minister has been kind enough to restrict the hike to Rs 100/10 grams, although in strict proportionate terms, the hike ought to have been of the order of Rs 200/10 grams.

Be that as it may, although in percentage terms the hike is a high 100 per cent, in the market place, an additional burden of Rs 100 on purchase of 10 grams gold at about Rs 14,500 will be just marginal. Consumers are unlikely to protest at this small increase. Someone who can afford to pay Rs 14,500 for 10 grams of gold can afford to pay an additional Rs 100.

Traders are, of course, a different lot. Many have already begun protesting against the hike. It would encourage off-market transactions, they claim. There is no reason why they should oppose the levy.

Traders are going to pass on the fiscal burden on to the consumers. Any apprehension that an additional Rs 100/10 grams fiscal impost will hurt their business is unwarranted given the income elasticity of demand for gold. What may hurt India’s gold business is not the hike in customs duty, but high open market prices, suspect quality of gold jewellery and rampant speculation in the bourses and outside.

The Finance Minister should have gone beyond mere revenue generation and considered ways and means of bringing discipline in the trade as well as improving the welfare of artisans and small jewellers.

India is world’s largest importer of gold, a commodity that doubles as currency too and is known as a safe-haven asset for investment and as a hedge against inflation.

The country’s voracious appetite for this seemingly unproductive asset has resulted in a huge outgo of foreign exchange to the tune of $15-16 billion, equivalent to roughly Rs 75,000 crore at the current exchange rate. Who says India is a poor country!!!

Internationally, gold prices have been rising because of the tremendous speculative activity (speculators are euphemistically called investors). Indian market moves in tandem with London and New York. High import prices have resulted in falling import volumes (neutralised by rising prices). Even assuming that India’s imports during fiscal 2009-10 were to decline to say 400-500 tonnes, the revenue-starved government would still be able to mop up anything between Rs 800 crore and Rs 1,000 crore, a good job by the Finance Minister. Incidentally, a hike in customs duty on gold was part of a Business Line recommendation (BL June 15).

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