The government is set to hike the import duty on gold to 12-13 per cent from 10 per cent to control the widening current account deficit. The move will hit jewellery exports and pull down domestic demand.

Besides the option of increasing import duty, the government is also considering some policy measures to restrict gold imports, according to sources close to the decision-making process.

The margins of jewellery exporters have already shrunk as the gold cost for exporters is 13 per cent higher compared to that prevailing in competing countries due to the import duty of 10 per cent and the rupee depreciation of 14 per cent since January.

Rising worry

India’s current account deficit has increased to 2.4 per cent of GDP in the first quarter of this fiscal from 1.9 per cent in the March quarter. The fall in rupee value and spike in international crude oil prices have added to the Centre’s worries.

In 2013, when the rupee witnessed a similar fall, the government had increased import duty on gold to 10 per cent and imposed various curbs on shipments. Currently, there is a 3 per cent Goods and Service Tax on gold in addition to the import duty.

Colin Shah, Vice-Chairman, Gem and Jewellery Export Promotion Council, said any increase in import duty on gold will hamper jewellery exports, though no official announcement has been made on this front by the Centre.

“Jewellery exports have just started looking up due to the revival of demand in the US and any rise in cost by way of duty hike in India would hamper exports,” he said.

After a lull in the first three months of this fiscal, gem and jewellery exports started improving in July and increased 17 per cent in August to $2.49 billion ($2.12 billion) largely due to better demand in the US and other major importing countries.

Ajay Kumar, Director, Kedia Commodities, said any hike in import duty will provide only short-term relief as the jewellery demand in the domestic market is already very low and gold imports have fallen 30 per cent from 1,000 tonnes per annum in 2013 to the current level of 750 tonnes.

Moreover, he added, the hike in duty will provide more incentives for people to bring the yellow metal through unofficial channels and smuggling is already on the rise in the country.

The weak domestic demand is reflected in the current discount of $1 an ounce in the wholesale bullion market in Ahmedabad against a premium of $1-2 an ounce in the June-July period.

In August, gold imports more than doubled to a 15-month high of 100 tonnes as jewellers stocked up ahead of the peak festival season, which began this month.

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