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India mulls cut in import duty on gold

March 10, 2014

THE sharp decline in India’s current account deficit in the third quarter of the fiscal (October-December) to 0.9pc of GDP may lead to a cut in import duty on gold.

Last year, the government raised import duty on gold to 10pc, as the Indian currency plunged following a widening current account deficit (CAD). The deficit shot up to a record $88bn last fiscal (2012-13), accounting for 4.8pc of the GDP. Finance minister P. Chidambaram, who recently presented his interim budget, is confident that the CAD would decline to $45bn for this fiscal, which ends on March 31.

Last week, Chidambaram promised to take a call on easing duties on gold imports after the CAD figures were released. Hours later, the Reserve Bank of India (RBI), the central bank, revealed that the CAD for the third quarter was down to $4.2bn (0.9pc of GDP) as against $31.9bn (6.5pc of GDP) in Q3 of the previous fiscal. This was the lowest CAD in eight years.

The deficit for the nine-month period of the fiscal (April-December) narrowed to 2.3pc of the GDP (or $31.1bn), as compared to 5.2pc ($69.8bn) for the same period in the previous fiscal. “The lower CAD was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports,” said the RBI.

Worried over the widening deficit and the plunging rupee, the government last year raised the import duty on the yellow metal from 2pc to 10pc. It also introduced a new, 80:20 scheme, where it allowed nominated agencies to import gold only if they exported 20 per cent of the metal.

Gold imports have fallen sharply after these twin measures were initiated by the government. According to the World Gold Council (WGC), China overtook India to emerge as the world’s top importer of gold in 2013.

While demand in India continued to be strong, official imports dipped slightly in 2013. The WGC estimates that domestic demand for gold in India was at 975 tonnes in 2013. Somasundaram PR, managing director, WGC India, estimates that nearly 200 tonnes of gold might have been smuggled into the country last year. Unofficial imports have almost doubled in 2013 as compared to the previous year, feels the council.

Official imports of gold fell to just $3.1bn in the last quarter of calendar 2013, as against $17.8bn a year ago. India’s official imports of gold were more than 160 tonnes last May. But this has reduced to a trickle of just 20 to 30 tonnes a month towards the end of the year.

According to RBI figures, merchandise imports fell by 14.8pc to $112.9bn in the third quarter of the fiscal, as against an increase of 10.4pc in Q3 of the previous financial year. Overall, the balance of payments was also positive, resulting in a net accretion of $19.1bn in the foreign exchange reserves towards the end of Q3.

THERE is a growing pressure on the United Progressive Alliance (UPA) government, now in the final weeks of its second term (last week the Election Commission announced a nine-phase voting process beginning April 7; the results would be announced on May 16) to ease the curbs on gold imports.

In fact, in January, UPA chairperson and Congress president Sonia Gandhi had asked the government to consider easing the curbs including the 80:20 rule, and called for a reduction in duties. Gold and jewellery traders have also been demanding the withdrawal of import duties.

But despite the clamour for liberalising gold imports, the government has been tightening the screws on the trade. The India Bullion and Jewellers Association alleges that government agencies are raiding their members’ offices and shops, asking them to reconcile the gold bars with their imports.

The association has called for a nationwide strike this week to protest against the spot checks and the import curbs and the general harassment of bullion dealers and jewelers by government agencies. Mohit Kamboj, president of the association, claims that jewelers are being unfairly targeted and harassed.

Bullion dealers and jewelers are also eagerly awaiting the outcome of the general elections. The Associated Chambers of Commerce and Industry of India (Assocham) notes that gold prices may shoot in case there is instability in Delhi after the elections. “Gold prices in India may increase beyond Rs32,000 per 10 grams in the coming few months in case voters throw up a highly fractured mandate leading to an unstable government at the centre,” says an Assocham study, ‘Golden Connect of Indian Elections.’

But if a stable and decisive government is formed, even if it is a coalition of many parties, investors will switch over to equities and real estate, resulting in a fall in demand for gold.

“At the moment, three important factors are driving the global gold market: concerns over the Chinese economy, uncertainty over the pace of the US economic recovery and the anxiety around the Indian general elections,” notes the Assocham study. “India and China are competing with each other for retaining the slot of being the number one consumer of the yellow metal. The demand in these two markets is going to increase should the two economies witness political or economic uncertainties.”The trend of investors shifting again to gold as a safe haven is already being witnessed, claims the trade body. Gold prices have risen by over 10pc so far this year largely because of these reasons and the investor interest in bullion-backed exchange traded funds has returned.

D.S. Rawat, secretary-general, Assocham, adds: “While global factors will certainly weigh on gold prices, the Indian market as a consumer of the yellow metal and for the equities would be surely affected by the unfolding developments.”