Higher duty will only encourage import of gold illegally: Nomura

A day after the government increased the import duty on gold by 2 percentage points to 6 percent, foreign brokerage Nomura has termed the hike as as a means to tackle the symptom and not the case since it will shift gold shipments to “unofficial channels”.

“Unless investors have options on other financial instruments, which provide an inflation hedge, we think import duties will only lead to a reduction in gold imports through the official channel and result in a simultaneous rise in gold imports through unofficial channels,” it said in a report today.

Illegal trade was rampant before restrictions on gold shipments were lifted in 1990.

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India’s gold imports likely to ease to $44 billion in fiscal 2014 from an estimated $48.3 billion in fiscal 2013 in value terms, marking a 0.2 percentage point drop, Nomura estimates.

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Nomura also estimates that gold imports are not entirely responsible for the widening current account deficit.

Nomura said current account deficit could moderate to 4.3 percent of GDP in FY14 from an estimated 4.9 percent in FY13, “remaining above sustainable levels,” due to high oil prices and continued domestic supply-side constraints that boost imports.

The government on Monday raised the import duty on gold to 6 percent, the second such increase in less than one year in order to discourage gold buying and controlling the ballooning fiscal deficit.

With inputs from Reuters