Govt hikes import duty on gold by 50% to 6 percent

The finance ministry today increased the import duty on gold to 6 percent from 4 percent effective immediately, a government press release said today, in a bid to cut down ballooning current account deficit.

A widening current account defict- the difference between export earnings and import expenses net of cash payments and remittances - is a worrying sign for India where fulfilling immediate dollar payment obligations may necessitate dipping into the pool of foreign exchange reserves. CAD had risen to $38.7 billion or 4.6 percent of the GDP (gross domestic product) during the first half of the current fiscal. Of this, a major contribution was by way of gold imports, amounting to $20.25 billion.

Economists have attributed India’s widening current account deficit to rising gold imports, among other causes.

Meanwhile the government has proposed a link between the Gold ETF and Gold Deposit Scheme to unfreeze a part of gold held under ETF.

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The minimum quantity of gold that may be deposited and the tenure of deposit has also been reduced to six months from three years earlier.

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The news sent gold futures higher by a percent.

The duties will be reviewed if there is a moderation in gold imports, said Economic Affairs Secretary Arvind Mayaram.

He further said the government will link Gold Exchange Traded Fund (ETF) with gold deposit scheme, which will enable mutual funds to unlock their physical gold and invest in gold-linked schemes offered by banks.

“The changes proposed to the Gold deposit scheme will make it attractive for individuals to deposit their idle gold with the banks under the Gold deposit scheme,” Mayaram said. He said the changes would help moderate import of gold and help in bridging the current account deficit (CAD). Gold imports in 2011-12 amounted to $56.5 billion and in the current financial year, till December, they are estimated at $38 billion.

Gold is the biggest contributor to the import bill after crude oil and is easier to tame than energy supplies.

Mayaram further said that the government will effect consequential changes in the additional customs duty and excise duty on gold dore bars, gold ores and refined gold.“The duties will be reviewed after sometime if there is a moderation in the quantity of gold that is imported into the country,” he said.

Gold was trading at Rs 30,935 per 10 grams today.The move to link Gold ETF with deposit schemes will help

increase physical availability of gold in the market, as a part of the gold lying in stock will be brought into circulation meeting the demand of gems and jewellery trade.

“Consequently, there will be a moderation in the quantity of gold that is imported into the country,” Mayaram said. He said the minimum quantity of gold that may be deposited into the Gold deposit scheme would be reduced and the minimum tenure would be brought down to six months, from the present three years.

Market regulator Sebi and the Reserve Bank will come out with notifications on Gold ETF and gold deposit schemes in two to three weeks.Gold ETF is provided by Mutual Funds (MF), in which the units are backed by physical gold held by the MFs. Gold deposit schemes are offered by a number of banks, in which gold deposited by client is lent by the banks to the gems and jewellery trade.

The announcement, which follows concerns expressed by Finance Minister P Chidambaram over rising imports of gold, comes nearly a month before the Union Budget on February 28.Traditionally, India has been the world’s largest consumer and importer of gold.

Outflow of the foreign exchange on gold imports is impacting country’s CAD, which has widened to $38.7 billion or 4.6 percent of the GDP in the first half of the current fiscal.

Finance Minister P Chidambaram had earlier said he said he was considering reining in imports of gold, used as an investment tool but which mean a drain on foreign currency reserves.

The government had doubled the import duty on gold to 4 percent in March last year.

Recently, the Reserve Bank of India executive Director Deepak Mohanty urged investors to shift from physical gold as a hedge against rising prices to financial products like inflation-linked bonds.

India’s gold imports rose 9 percent to 223.1 tonnes in the September quarter, after a 56 percent fall in the June quarter to 131 tonnes. Analysts predict a recovery in the December quarter due to peak festival- and wedding-season buying.

With inputs from Agencies