Will Gold Duty Hike Be A Game Changer?

Burgeoning gold imports have long been perceived as a major contributor to the current account deficit. There is every justification for the government imposing a higher duty on gold imports. - Shri V.P. Nandakumar MD & CEO Manappuram Finance Ltd.

Tough times call for tough measures and the Union government on July 1 opted for the decisive step of raising effective import duty on gold to 15% from 10.75%. The basic customs duty on gold was 7.5 per cent and this was increased to 12.5 per cent. When agriculture infrastructure development cess (AIDC) of 2.5 per cent is added, the effective duty becomes 15 per cent.

The move came in the wake of the rupee touching a new low of 78.97 against the US dollar. Despite frequent interventions by the Central Bank, the rupee has depreciated by over 5% against the dollar this year. Foreign exchange reserves are declining and the country’s trade deficit had ballooned to a whopping $24.9 billion in May from $6.53 billion in the same month last year.

Burgeoning gold imports have long been perceived as a major contributor to the current account deficit. There is every justification for the government imposing a higher duty on gold imports. But what we need to consider is, what will be the fallout of this and will it have any significant impact?

The rationale behind the latest move is that once the import duty is increased, the price of gold will shoot up, bringing down the demand for the yellow metal, which in turn will stanch the demand for dollars and bring down the trade deficit.