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Gold customs duty rise may reduce investment demand
April, 23rd 2012

Gold imports are expected to have touched $60 billion in the previous financial year, justifying the governments move to raise customs duty to four per cent, as high gold and oil imports led to the widening of the current account deficit, which stood at four per cent of the gross domestic product (GDP) in the first nine months of 2011-12. Finance ministry officials say a rise in customs duty would lower investment demand, though consumption demand may remain high.

During April-February 2011-12, gold imports stood at $54.5 billion, according to data by the commerce ministry. Earlier, the Prime Ministers Economic Advisory Council (PMEAC) had projected gold imports would rise to about $58 billion in 2011-12. These stood at $15 billion, $22 billion, $30 billion and $33 billion in 2007-08, 2008-09, 2009-10 and 2010-11, respectively.

Now, the moot issue is whether the rise in customs duty on imports would actually lead to lower gold imports this financial year. Since December 2011, the import duty on gold was increased from Rs 300 per 10 grams to one per cent, two per cent in January and to four per cent in the Budget.
Experts say gold imports have already started declining. In January, their volume fell 20 per cent year-on-year. However, finance ministry officials said while the investment demand in India may decline, consumption demand may remain undeterred, owing to the nature of the Indian society.

The PMEAC had expected gold imports to fall to $38 billion this financial year, as macro-economic parameters returned to stable levels. It argued gold imports would decline, as other investment opportunities increased. The PMEACs projections were released before the announcement of the Budget.

Mahesh Vyas, managing director and chief exec-utive officer, Centre for Monitoring Indian Economy, however, did not expect gold imports to fall significantly this financial year. The increase of import duty on gold to four per cent is not a big concern, as the demand for gold keeps rising relentlessly. Indians appetite for gold remains insatiated. As a result, there has been no let-up in gold imports, and this has been rising persistently for the last 10 years, despite the rise in its prices, he said.

However, a finance ministry official said gold imports were high last year because of volatile gold prices. This year, imports may stablise as there was little incentive to hoard, he added. Now, gold imports have stabilised and there is less increment to store it. With the increase in duty, investment demand may come down, but consumption demand might not get affected, he said.

These days, gold is imported by India on a consignment basis, and traders sell it in the market with a margin of Rs 50-100 per tola (11.66 grams). Demand for gold in India grew 25 per cent in the last decade, despite a considerable increase in global price rise. A research by the World Gold Council shows by 2020, cumulative annual demand for gold in India would increase to 1,200 tonnes.

During April-September 2011, the volume of gold imported by India is estimated to have risen 25.1 per cent to 554 tonnes, while global gold prices by 31.1 per cent to $1,607 per troy ounce in the same period, according to Reserve Bank of India data.

Currently, global gold prices stand at about $1,657 an ounce (an ounce is approximately 31.3 grams).

Gold imports have not been hampered due to the rise in prices. Rather, we are seeing its imports rise, and the trend is only going to continue, said Ajay Sahai, director-general and chief executive, Federation of Indian Export Organisations.

Though importers are not complaining, they are concerned about the fact that in spite of a lot of gold coming into India, it is ending up in lockers, and not leading to any value addition.

The rise in gold imports in the previous financial year was primarily due to the rise in prices. Prices have almost doubled in the last two years. Raw gold, which is kept in lockers, is unproductive and that is a cause of worry, said Rajiv Jain, chairman, Gems and Jewellery Export Promotion Council.

Both the PMEAC and the ministry of commerce & industry say the rise in gold and oil imports is expected to swell the countrys trade deficit to $170-$175 billion in 2011-12, or 3.6 per cent of the GDP. The PMEAC expects the current account deficit to fall to three per cent of GDP this financial year.

Gold is integral to Indian weddings. Purchases relating to weddings typically account for 50 per cent of the annual jewellery demand.

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