Is increasing import duty on gold a good move? - NO

Aarati Krishnan | Updated on March 09, 2018 Published on January 25, 2013

The 2 per cent hike in import duty on gold from 4 to 6 per cent may not materially curtail the Indian appetite for the yellow metal. Nor is it likely to miraculously rebalance the country’s current account.

To start with, the magnitude of this hike is quite small. A 2 per cent rise in gold prices is a flea-bite, given that Indian buyers have gotten used to daily gold price swings of 3-4 per cent. After all, Indian gold imports have soared from $21 to $56 billion between 2009 and 2012, despite an 81 per cent rise in domestic gold prices.

India’s appetite for gold, despite rising prices, can be attributed to three reasons. One, two-thirds of the gold consumption comes from jewellery purchases to mark weddings and other auspicious occasions. This portion of gold demand will certainly not decline sharply just because of prices; buyers may at best economise on grammage to buy the same value of jewellery.

Two, Indians are convinced of the virtues of gold as an investment option for good reason. By delivering a 21 per cent annual return over the past five years, when bank deposits averaged 9 per cent and equities managed only 3 per cent, gold today has a return record that is hard to ignore. It has comfortably beaten runaway inflation.

Finally, investing in gold does not entail complicated Know Your Client norms (PAN card requirements for jewellery purchases are recent) and usually helps one avoid tax, unlike financial instruments.

Yes, gold is not an ideal investment because it is essentially unproductive, offers no regular cash flows and has no valuation metrics to assess its intrinsic value.

Nor is it ‘safe’ as people believe because prices can tumble as easily as they have soared over the last five years. But chasing assets that have delivered good returns in the recent past is what investors typically do the world over. It will take more than policy tweaks and patriotic exhortations to change that.

This is not to say that India’s burgeoning current account deficit (CAD) is not a concern. It certainly is, but making gold imports marginally more expensive is not going to make a big difference to it.

Though the government likes to point out that gold imports make up ‘two-thirds’ of the CAD, the oil import bill is three times the value of gold imports. So, even assuming, for argument’s sake, that these moves will trim gold imports by 30 per cent, the CAD will not disappear. For that, we need to fix sluggish exports and the relentless increase in energy imports.

Published on January 25, 2013
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