The escalation of tariff on gold import in the recent past shows the Centre’s commitment towards curbing gold imports, which creates perennial pressure on India’s current account deficit. Will such a policy succeed?
A study for the period April 1996 to March 2014 conducted by us on sensitivity of demand for yellow metal to prices and other factors in India reveals that such tariff increases may have negligible effect.
In 2009-10, the Indian government had increased import duty on all forms of gold imports, but this had minimal impact on buying. In January 2012, import duty on gold was again raised to 2 per cent of value from the earlier flat ₹300/10 gm and subsequently three times in 2013 to 10 per cent.
In 2013, the Reserve Bank of India (RBI) introduced the 80:20 scheme which required gold importers to re-export 20 per cent of the incoming gold and also banned import of gold through star trading houses. But the resultant shortfall in supply had led to a phenomenal rise in the premium on gold in the market and a spike in gold smuggling.
Gold demand in India is, by no means, easy to understand. The massive accumulation of gold for centuries has led to approximately 22,000 tonnes of gold being hoarded by Indian households (FICCI-WGC, 2014). The demand for gold is driven by economic, socio-cultural and psychological factors.
Three forms of consumption
In India almost the entire demand for gold is met by imports. It is imported in three forms, namely powder, semi-manufactured and unwrought forms. Gold jewellery demand is linked to the first two forms whereas the latter represent demand for gold bars. The changing demand pattern is reflected in the spectacular rise in import of gold bars due to its appeal as ‘safe haven’ after mid-2008. On the contrary, jewellery demand dropped in 2008 and 2009 and remained steady afterwards.
There are two important aspects of gold demand which are usually overlooked by policy makers. First, many decisions concerning gold consumption take time to change.
These decisions include long-term commitments such as accumulating wealth for adverse financial situations. Second, there may exist a psychological stock in consumers’ mind. If the stock of gold falls short, s/he would purchase gold. Quite often the policies are based on aggregate gold demand pattern, while different components of gold-demand behave differently.
Our study finds that jewellery demand is more sensitive to price changes than the demand for gold bars. During the study period, the proportion of imports of unwrought form of gold (i.e. bars) had been 82.8 per cent on an average and never fallen below 53.3 per cent, while the other two forms of gold have been 17.2 per cent on an average and never shot up beyond 46.7 per cent.
Therefore the tariff escalation would not reduce import of gold bars substantially, while it could bring down gold jewellery demand more in the long run than in the short run.
In the post-crisis period, gold jewellery demand was subdued following a successive rise in tariff, but the total gold demand remained virtually unaffected due to resilience in demand for bars. Such findings should help policymakers.
The writers are with IMI Kolkata, Jadavpur University and Jadavpur University, respectively