Addressing Gold Imports

Why in news?

Union government plans to curb the gold imports under non-essential imports.

What is the status of India’s gold import?

Given India’s imports of gold were $8.4bn in Q1FY19, they were 18% of the trade deficit in that quarter.
Indeed, with the current account deficit for FY19 looking like it could be in the 2.8% of GDP range.
Between FY17 and FY18, for instance, prices of gold fell from Rs 27,133 per ten grams to Rs 26,633.
During this period, demand also rose, from 172.5 tonnes to 181.2 tonnes.
The increased demand was just driven by only prices and also the fact that GDP growth fell from 7.2% in FY17 to 6.7% in FY18.

Why government want to curb gold imports?

During FY13 and FY14, for instance, gold prices collapsed from Rs 28,923 per tonne to Rs 25,752.
But instead of demand shooting up, it fell from 234.2 tonnes to 224.2 tonnes, primarily due to the fact that GDP rose from 5.5% to 6.4% in this period.
In FY15, prices fell further, to Rs 24,506 per tonne, but demand continued to fall, to 214.5 tonnes, once again due to the fact that GDP growth rose, to 7.5%.
Looked at another way, demand has continued to fall even though the current import duty of 10% was put in place over five years ago.
Demand was 222.4 tonnes in FY14—the duty was raised from 8% to 10% in August 2013 and it was 181.2 tonnes in FY18.
Even so, the absolute value of imports is high at $34bn in FY18 and $28bn in FY17 it was at its peak in FY12, at $57bn, So, the government would want to cut imports.
Union government to address this issue is looking at how to curb “non-essential imports”, and gold is seen as one such import.

What are the issues with government’s plan?

Hiking import duties, however, may not work much since gold demand is not always driven by prices, and a lot depends upon the state of the economy, both locally as well as internationally.
There is also the likelihood of smuggling increasing as import duties rise, they are already a high 10%.
To the extent gold is a form of saving, a 10% import duty is, though, unfair to begin with since no other form of savings attracts a tax, leave alone a high one.

What measures needs to be considered?

To meet the objective of lowering imports while making savings in gold possible that the government came out with various gold bonds since November 2015.
But there was little demand for gold bonds is that as the scheme does not have the essential properties of gold.
It is not, for instance, available 24×7, but is sold in fixed tranches by the government.
Once bought, it is not liquid and needs to be held for five years before redemption, a secondary market does exist, but this is hardly as liquid.
Nor are gold prices of the current day used for either purchases or sales; an average of the last few days is used.
This means, that if gold prices are falling, anyone buying a bond ends up paying a higher price.
And when prices are rising, anyone selling ends up getting a lower price.
If the government is serious about lowering gold demand, rather than looking at hiking the import duty, it must find ways to make the gold bond a success.

Source: Financial Express