Indian government to hike gold import tariffs – again

2013-JAN-08

As if last year's new regulations from the Indian government had not caused enough turmoil at the local gold markets, tomorrow the Ministry of Finance and the Reserve Bank of India (RBI) will be publishing new regulations aimed at raising gold import taxes to 6%. Gold dealers are appalled at these new measures and argue that the country’s gold market – the second largest in the world – is being unfairly scapegoated in response to weakness in the rupee and the large current account deficit. They and many economists argue that such measures are counterproductive, and show that the Indian government is still too wedded to the kind of market controls that became a hallmark of the country’s socialist economy following independence.

Last year the Indian government quadrupled its gold import taxes from 1% to 4%. This week it is expected to release new plans for raising the rate to 6%. In April last year the RBI instructed all Indian commercial banks to deliver biannual reports on the total volume and financial value of all gold imports by financial institutions, banks, gold trading agencies, import and export companies as well as specific gold and jewellery dealers.

However, such measures have had little impact on Indian demand for physical gold. According to the RBI, the country's gold imports account for approximately 80% of its current account deficit. Therefore, the central bank has once again decided to turn the thumbscrew. Last month India's commercial banks were barred from granting credit for gold purchases.

During fiscal year 2011/12, India's current account deficit climbed to 4.2% of GDP. The rupee was one of the world's worst performing currencies and continued dropping in relation to the US dollar and other major currencies. Simultaneously gold imports climbed by roughly 40% in comparison with the previous year, reaching a financial value of approximately US$62 billion.

The rupee's devaluation is especially problematic for the Indian government because almost of all of the subcontinent’s crude oil is imported. A weakening rupee therefore means higher oil and petroleum product prices. The RBI could try raising interest rates in order to bolster the rupee, but this could come at the cost of choking of economic growth.

According to estimates, there are around 25,000 tonnes of privately held gold in India. For some time senior politicians have been trying to find a way to stimulate dishoarding of this gold, as a means of stimulating the economy. A few months ago the All India Gems & Jewellery Trade Federation said that a plan was needed to make private and religious holders lend portions of their gold to dealers.

Large Indian traders fear that increased regulation means that they could start to lose out to other Asian competitors – notably, to dealers in the United Arab Emirates, Turkey and China. Gold trade policies in these countries are fundamentally liberal, as – in contrast to India – they are encouraging gold buying.