Finance minister P Chidambaram on Wednesday hinted at raising Customs duty on gold, as the government seeks to curb the yellow metal’s imports, a key reason for India’s widening current account deficit (CAD).
India's CAD, the difference between a country’s import and exports of goods, services and transfers, widened to a record 5.4 per cent of gross domestic product in the second quarter of the current financial year against 4.2 per cent a year ago.
“We may be left with no choice but to make it a little more expensive to import gold. This matter is under the government’s consideration,” Chidambaram said on Wednesday, as he appealed to the people to scale down the demand for imported gold.
Though the finance minister did not specify the measure that might be taken to curb gold imports, indications are that the government might slap a higher duty to make imports more expensive. The Reserve Bank of India (RBI) and Prime Minister's Economic Advisory Council (PMEAC) also support the measure.
In the last Budget, then finance minister Pranab Mukherjee had doubled the basic customs duty on standard gold bars to four per cent and on non-standard gold to 10 per cent. This sparked fears of increase in smuggling of gold. Chidambaram agreed some amount of smuggling might have taken place, but it was mostly speculative.
For the first half of 2012-13, CAD was at a record 4.6 per cent of GDP against four per cent in the last corresponding period. Exports recorded a sharp decline of 7.4 per cent, while imports posted a fall of 4.3 per cent, leading to a widening of the trade deficit during the period. Of the imports, gold imports amounted to $20.25 billion (Rs 1.1 lakh crore).
“Gold imports constituted a substantial chunk of the imports and is a huge drain on the current account. Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion,” Chidambaram said.
The minister said that despite the widening of CAD, the positive aspect was that it was financed without drawing on reserves. This was mainly due to the inflow of foreign direct investment worth $12.8 billion and FII (foreign institutional investor) inflows worth $6.2 billion. In addition, external commercial borrowing was amounted to $1.7 billion.
“The net result is that we have not drawn on the foreign exchange reserves and, in fact, there is a marginal accretion of $0.4 billion to the foreign exchange reserves,” Chidambaram added.
However, the data given by the finance minister was for the first half. In the second quarter, there was in fact, a marginal drawdown of forex reserves by $0.2 billion.
Chidambaram said attracting foreign funds to India has become an economic imperative and that even if this year ended with a slightly larger CAD than last year, the government would be able to finance it without drawing upon reserves.
In a draft report on Wednesday, a working group of RBI called for a need to moderate gold import demand. It recommended revisiting fiscal measures to reduce gold imports and the need to design innovative financial instruments that can provide real returns to investors.
PMEAC chairman C Rangarajan said CAD was likely to be around last year's level of 4.2 per cent of GDP for 2012-13 and there was a need to address the issue by curbing import of gold. In its report released earlier, PMEAC had pegged CAD to come down to 3.6 per cent of GDP this financial year.