Will import curbs on gold be effective? Yes

The Government’s move to clamp down on gold imports will be effective, in the short term.

With the rupee threatening to move towards 58 against the dollar and the current account deficit (CAD) at record levels, the Reserve Bank of India (RBI) is taking the easiest route to tackle both, by clamping down on gold imports.

The central bank has announced a series of measures over the past month, including restraining lending against gold-backed assets, and restricting gold imports. The hike in gold import duty from 6 per cent to 8 per cent is the most recent announcement in this drive.

These moves will help bring down the frenzied increase in gold imports and help improve sentiment in the rupee. But the impact is likely to be short-term and the government and the Central Bank need to address structural issues to find lasting solution to the mounting CAD.

Empirical data shows that hike in gold import duty has resulted in drop in gold imports in subsequent months. For instance, the increase in duty from 1 to 2 per cent in January 2012, immediately followed by another hike from 2 to 4 per cent in March that year, resulted in monthly gold imports declining from $5,224 million in January 2012 to $1,835 million by June that year.

Similarly increase in gold import duty from 4 to 6 per cent this January resulted in import bill declining from $7,194 million in January to $3147 in March.

The current hike can, therefore, serve the government’s purpose of bringing down the import bill that is threatening to bloat due to the gold buying frenzy, witnessed in the aftermath of the sharp decline in gold prices in April.

If we look at the country’s trade balance, the deterioration is due to either external factors or structural issues. Services exports are hit due to the ongoing slowdown in the Euro Zone, while other exports need a long-term strategic plan to improve their competitiveness in global markets. Of the list of imports, the largest segment, that comprises crude and coal can not be clamped upon, nor can the domestic output be increased overnight.

The only area where the government has room for manoeuvre is gold imports.

Even though gold imports account for only 15 per cent of the country’s imports, doubling of the import bill in this commodity can have a disastrous impact on the CAD.

Not many would complain now about the RBI’s move since gold’s lure as an investment avenue has diminished slightly with the recent fall in prices. By launching inflation-indexed bonds, the RBI now need not have qualms about depriving investors of a hedging instrument against rising prices.

Read also: Will import curbs on gold be effective? No

COMMENT NOW