The Government on Tuesday hiked customs duty on gold and platinum to record 10 per cent from existing 8 per cent and that of silver to 10 per cent from 6 per cent. The hike was necessitated to contain the Current Account Deficit (CAD), which stood at a record high of 4.8 per cent ($88.2 billion) in 2012-13. A high CAD impacts the value of currency, which in turn makes imports expensive and adds to the fiscal deficit.
This was the third hike in eight months. The hike in customs duty will lead to a hike in jewellery prices as jewellers will opt to pass on the increased price of gold to customers.
India imported 845 tonnes of gold in 2012-13 valued at Rs 2,45,862 crore and 1963 meteric tonnes of silver at Rs 1,691 crore in the same period.
Addressing the media here on Tuesday, Revenue Secretary Sumit Bose said, “Imports of gold and silver have witnessed a huge surge in the recent months, the imports of gold increased from 205 metric tonne in April-July 2012 to 383 metric tonne in April-July 2013, an increase of 87 per cent.”
Bose said that the government was still working on the proposed hike in import duties on non-essential goods.
Finance Minister P Chidambaram on Monday emphasised that 3.7 per cent CAD in 2013-14 is a “red-line” and will not be breached under any circumstances.
Given the current level of imports, the government excepts to mop up revenues to the tune of Rs 4,830 crore from duty hike for rest of the financial year ending March 31, 2014.
The present move is aimed at compressing gold import in the country as India is the largest importer of gold after China and is the second largest importer of crude oil, the primary reasons for India’s increased CAD.
According to government’s own estimate India will require $100 billion to finance its CAD. CAD is when a country’s total import of goods, services and transfers is greater than the country’s total export of goods, services and transfers.
Welcoming the government’s move of hiking customs duty on gold and silver, chairman and managing director of Gitanjali Gems, Mehul C Choksi said, “This will lead to a hike in price of jewellery and we will have to pass it on to the consumers. However, the organised players will suffer.”
“No doubt, a hike in duty in gold imports would curb demand for gold in the short run. But from a long term perspective it is counterproductive as it would encourage smuggling of the precious metal,” CII Director General Chandrajit Banerjee said in a statement.
The hike in duties comes a day after Chidambaram said the government was looking to contain gold imports at 850 tonnes this fiscal, after imports of 950 tonnes last year.
According to Jayant Manglik, president – Retail Distribution, Religare Securities, “This (the hike in customs duty) is in line with the government’s strategy of reducing CAD by lowering demand for gold which will ultimately support the rupee. The only fear is that this may make gold smuggling attractive again.”
Analysts suspect gold smuggling could see a rise from neighbouring countries including Pakistan, Sri Lanka and Nepal which too have imposed severe restrictions on gold trade.
Gold was trading at Rs 28,928 per 10 grams at the bullion market in Delhi on Tuesday.