The suggestion by Union Finance Minister P. Chidambaram on Wednesday that the import duty on gold may have to be increased has not unsurprised many. The value share of bullion in the overall import bill is increasingly and getting intractable, adversely impacting the balance of payments. This is all the more painful now than seldom in the past when the country’s exports have been traversing on a negative zone, jolting the trade deficit calculations wildly.

The two major import items’, gold and crude oil, cost had gone up in the wake of their global prices firming up in 2011-12 and in most months of the current fiscal when the Indian rupee was steadily losing its value vis-à-vis the US dollar upon which such imports were transacted by trade and industry. This had made the authorities to jack up the customs duty on the yellow metal twice once in January 17, 2012 and in the Union Budget 2012-13 in March in a bid to moderate domestic demand of gold.

Available import figures furnished in Parliament by the Finance Ministry in the winter session suggest that there was a distinct decline in import of gold from 589 tonnes in April-October 2011 to 398 tonnes in the corresponding seven months of the current fiscal. This is the direct aftermath of the twin hikes in 2012. If such a desirable result has supervened, why is it that the authorities now once again target gold import to further decelerate its demand through this tack? Chidambaram was quick to respond when he said “there is enough gold within the country for whatever purpose. But import of gold is a huge strain on the current account.”

But bullion trade is not happy over this overture. It said that instead of making the cost of gold unaffordable the Government could weigh less painful options.

For instance, a certain part of the total corpus in gold exchange-traded funds (ETFs) could be “loaned” to permitted categories of bulk gold importers including nominated agencies such as STC and MMTC to import gold, as an RBI expert group pointed out recently. This is particularly worthy because some importers have access to gold borrowings with pre-determined limits and they disburse interest for the gold. The transaction is eventually settled by purchasing gold at the end of the tenure of the loan. Such a step would augment the returns on the ETF investments and the demand for gold imports is put off, thereby exerting less pressure on balance of payments.

Considering the fact that India’s gem and jewellery exports providing job opportunities to millions is abjectly dependent on imported gold for churning out value-added products, the periodic jack-up in import duty on gold would render clandestine channels to crop up. The duty evaded in such routes would be immeasurably larger than any duty realised through permitted import channel, defeating the official objective.

Ultimately, as the mandarins of the Finance Ministry wrote in their review, the demand from the public for financial investments in assets that retain their value needs to be addressed. The clincher to the whole issue on gold would be to bring down inflation so that households begin to see better returns from traditional financial instruments, instead of upholding their unflinching faith in the “relic of a barbaric era” as Keynes once pertinently described the yellow metal.