With India’s gold imports for FY12 expected to touch $55 billion, the government has hiked import duties in a bid to slow the rate of imports.
Author: Shivom Seth
Posted: Tuesday , 17 Jan 2012
MUMBAI – In a move that is likely to push up domestic prices of bullion significantly in the world’s biggest consumer, the Indian government has raised the import tax on gold to 2% of its value, while that on silver has been changed to 6% of the value of import. Analysts and traders said the government has changed the import duty to discourage imports of both gold and silver. They added that the changes could nearly double duties on both metals.
The change in the structure of duties has ensured that gold’s import duty has been changed from a flat rate of $5.89 for every 10 grams to about $11.21 of the current value of gold, (2% of the value), while that on silver has been changed to $59.03 from $29.51 per kilo.
Imports during the month of December rose 19.8% to $37.8 billion. In the first three quarters, total imports registered a growth of 30.5% to $350.9 billion, mainly because of a sharp jump in imports of petroleum, gold and silver, machinery and electronics.
“Imports are now set to get more expensive and this hike will discourage imports to a large extent and immediately. In reality, that is what the government wants, since imports have made a huge dent in India’s growth story and growth seems to be flagging,” said Manish Mathur of broking firm, Angel Broking.
With India’s fascination for the metal, money has flowed into gold in recent months. Some analysts and economists are of the opinion that India’s household savings have moved away from productive financial assets to ensure that GDP has fallen to 9.7% during 2010-11 as compared to 12.1% in the previous year.
Gold imports are up nearly half a percentage point of the GDP in the last three years, implying that much more of Indian household savings are getting locked up in an unproductive asset.
“The shift away from financial savings to something which will just lie in lockers around the country could be a large contributing factor to lower growth,” said K Bansali, bullion analyst with a financial institution.
Another expert with a nationalised bank pointed out that money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in cupboards and bank lockers. “Money spent on gold is practically wasted and it is also excluded from the financial intermediation system. Imports needed to be curbed. It is a move in the right direction,” said Manoj Sontahlia, with a foreign brokerage here.
The massive jump in gold imports has also led to an increase in current account deficit.
Analysts added that on Tuesday, spot gold climbed 1.5% to a one-month high, after China announced better than expected economic growth in the last quarter of 2011. Spot silver rose nearly 2% to $30.52, heading for its biggest one day rally in a week. Prices of gold on the Multi Commodity Exchange rose after the duty hike with the February gold contract gaining as much as 1% to $546.49 per 10 gram. Silver for March delivery rose more than 2% at $1050 per kilo.
“If gold is removed from India’s trade deficit, there would be a significant jump, even a surplus in some months. The duty structure on precious metals has changed from specific to value linked. This will enable the exchequer to rake in an additional $118 million (Rs 600 crore) during the remaining months of the fiscal,” said Bansali.