India May Further Increase Gold Duty

May 15, 2013 at 10:25

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With gold imports spiking 138% year-on-year in April, driving up the import bill to $7.5 billion, an anxious government may be looking to raise import duty on the precious metal by two percentage points to 8%. The trade deficit for April widened to $17.8 billion compared with $10.3 billion in March, dampening hopes of a meaningful correction in India’s current account deficit (CAD), which hit a record 6.7% of GDP in the third quarter of FY13. Senior government officials, however, attempted to play down April’s jump in gold purchases, calling it an “aberration”.

Nevertheless, given that appetite for the precious metal remains robust and the CAD precarious, it’s possible steps will be taken to discourage purchases of gold.

The surge in demand for physical gold last month — after the duty was upped to 6% in January — has been explained by the dramatic drop in global gold prices in the wedding season even as investment demand showed signs of moderating. Economic affairs secretary Arvind Mayaram told reporters it appeared that traders imported large quantities as a hedge against a future rise.

“It’s an aberration… But then, there is a limit on how much you can buy and hold. Because there is a carrying cost to that. So, I believe we will see some correction next month. We don’t believe imports are going to be at the same level,” Mayaram said.

Planning Commission deputy chairman Montek Singh Ahluwalia too said imports should come down by half from last year’s levels.

“I would expect in 2013-14, given the changing economic situation, there will be significant easing off of gold imports,” Ahluwalia said.

Given the strong appetite in the first four months of 2013, the World Gold Council has estimated that demand would rise marginally to 900 tonnes in calendar 2013 despite several duty hikes. Imports in 2012 were around 862 tonnes. While retail demand shows little sign of abating, there has been a drop in import orders for Swiss branded gold coins sold by banks in India.

For nearly a week now, domestic banks have cut down on orders for gold coins to international bullion banks. Traders from the physical market said banks had stopped placing fresh orders for Swiss coins after the Reserve Bank of India (RBI) restricted imports on a consignment basis. The RBI notified the change in policy on Monday after making the announcement in its annual policy statement on May 3,2013.” Even as they are looking to get rid of the backlog of gold coins they hold, banks have more or less stopped placing fresh orders,” said a trader.

Executives at two public sector banks and one leading private sector bank confirmed that while banks continue to sell the existing stock of gold coins, they are unlikely to place fresh orders as the new restrictions placed by the RBI only allow banks to import gold on a consignment basis to meet genuine needs of exporters of gold jewellery.

However, the impact of this may be marginal, since imports of branded Swiss gold coins add up to 25-30 tonnes annually. The larger proportion of demand, for bars and coins, is routed directly through jewellers who sell unbranded coins and bars. Investment demand accounts for 30-40% of India’s annual gold demand.

“The effect of these changes may only be visible in the next two to three weeks,” said Anand Krishnamoorthy of Valcambi, a leading precious metal refiner based in Switzerland. However, he adds that “given that such a modest quantity cannot skew the current account or trade deficit, banks may be hoping that the central bank gives a clarification on the import of gold coin,” said Krishnamoorthy.

Policymakers have been grappling with ways to reduce demand for gold in India as India’s current account deficit surged to unsustainable levels. For FY13, the current account deficit is expected to be close to 5% of GDP, almost double the 2,5% which is considered to be sustainable for an economy like India.