Sunday, 13 Oct, 2024
For many Indian households, gold is not just something to flaunt, but is used an an instrument of savings that could used during a financial emergency.
On June 30, 2020, the Union Government issued a gazette notification that raised the basic import duty on gold from 7.5% to 12.5%. If one takes the surcharge into account, the effective tax on gold imports will be 15%. The move is aimed at curbing both resurgent demand and imports of gold as Indians renew their obsession with the metal. In May, 2022, India paid a whopping $ 6 billion import bill for gold, an all time record. Along oil, this was the main reason for the trade deficit for May to zoom to $24.3 billion from $ 6.5 billion in May 2021. Policy makers reckon that such trade deficits are simply not sustainable at a time when the value of the Rupee vis a vis the American dollar is falling and when global financial investors are pulling capital out of emerging markets. In just a few months, the foreign exchange reserves of India have declined from $ 640 billion to $ 595 billion.
While there is no cause for alarm, it is a worrying sign. Since oil and other essential imports are key to sustain GDP growth, the axe has fallen on gold imports. Analysts reckon that prices of gold will go up and lead to at least a temporary slump in demand.
The Indian love affair or obsession with gold is legendary and India is the second largest importer of gold after China. For many Indian households, gold is not just something to flaunt, but is used an an instrument of savings that could used during a financial emergency. Gold came in very handy during the pandemic when millions of citizens lost jobs or saw falling incomes. According to Reserve Bank of India data, the value of gold mortgaged in a month was about Rs 25,000 crores a month before the pandemic. After the pandemic hit, the value shot up to about Rs 65,000 crores a month. Even anecdotally, one could witness a big jump in non banking financial companies splurge on advertising to promote gold “loans”.
Even when there is no crisis, the demand for gold simply refuses to fade away. As the accompanying chart shows, the value of gold imports has been rising more or less relentlessly in the last many years, barring one odd year. Overall, the value of gold imports in the financial year 2016-17 was Rs 184439 crores. By 2021-22, it had ballooned and almost doubled to Rs 358050 crores. When you translate this into dollars, the drain on foreign exchange reserves and the pressure on trade deficits becomes very evident. The year 2019-20 was the only unusual year when the value of gold imports actually declined compared to the previous year. But at the moment, the demand seems to be exploding. The total value of gold imports in 2021-22 was about $ 46 billion. In May, 2022 alone, it was $ 6 billion. At this rate, the value of gold imports in the current year could jump even more to cross $ 60 billion.
That explains the move to raise the import duty by 5%. But as the price differential in Nisan and global markets widens, one can also seem more gold smuggling.
