After shrinking to an eight-year low in FY17, India’s bullion import bill is showing signs of bloating again. Latest data from the commerce ministry indicate that gold imports in the first four months of this fiscal, at $13.35 billion, doubled in value from the year-ago period. This contributed to a threefold expansion in the merchandise trade deficit to $34 billion. Given that gold imports have been a wild card factor in trade imbalances, the new number calls for deeper analysis and vigilance.
Reports suggest that both one-off and structural factors have been at play behind the recent surge in gold imports. In May and June, fears of high tariffs under GST led to the bullion trade stockpiling material. But with the actual GST rate (3 per cent) fixed at modest levels, imports on this count have begun to normalise. Then, gold imports spiked in July as some sections of trade exploited a tariff loophole that allowed zero-duty imports from South Korea. While gold typically attracts a 10 per cent customs duty, India had waived this duty for shipments from trading partners such as South Korea under free trade pacts. Pre-GST, such imports were held off by a countervailing duty (CVD) of 12.5 per cent. But as CVD got subsumed by GST, bullion imports from these regimes suddenly turned cheaper and there are complaints of this route being used for round-tripping. To plug this loophole, the Centre should urgently consider measures such as a safeguard duty or minimum value-addition norms for exports. But while policy intervention is needed to curb opportunistic imports, the Centre should refrain from knee-jerk measures to quell genuine consumption demand for gold — which is also likely to revive in the coming months.
Jewellery purchases by Indian households have been at an unusually low ebb in the last two years, due to poor monsoons, which impacted rural buying, and the cash crunch post demonetisation. But these variables are now normalising and, therefore, it is quite likely that households, particularly in rural India, will resume their bullion buying. Last time around, the Centre sought to forcibly deter such purchases through high import tariffs and the draconian 80-20 rule. It would now be best to allow consumers to exercise their freedom of choice. In the last three years, financial inclusion initiatives such as the Jan Dhan Yojana have made deep inroads and urban savers have taken to mutual funds in a big way. This suggests that while consumption demand for gold may revive, investment demand is unlikely to revert to the alarming levels seen in the past. Even industry estimates peg India’s gold demand this year at 650-750 tonnes, way below the 900-1000 tonnes seen in the crisis years from 2010 to 2013. Given that demonetisation and GST are already forcing the rapid formalisation of the jewellery industry, a business-as-usual approach can have positive spill-over effects for the economy, both in terms of job creation and tax collection.