Imperative to Restrict Import of Gold

Union Budget 2012-13, proposes a hike in import duty on gold coins from 2 percent now to 4 percent. Similarly, Finance Minister has proposed to hike the import duty on non standard gold. In the budget for the first time, excise duty has been imposed, on unbranded jewelry at the rate of one percent. Taxes on raw gold and its ornaments has been a matter of hot debate in the country during 21-days long strike and government’s promise to bring changes in excise duty proposals. There is a general tendency to view excise duty on gold ornaments and import duty on gold with the same perspective. However, there is a need to view the two differently. It is true that both excise duty and custom duty are supposed to be imposed on gold. Nevertheless, the objectives to impose excise duty on gold ornaments and import duty significantly differ from each other. Objective of excise duty on gold is seemingly revenue generation, whereas objective of imposing custom duty has been to restrict import of gold, as stated by the Finance Minister also. Attempt to impose excise duty on unbranded jewelry, though aimed at, collecting revenue, may not be justified as it may hit millions of our small goldsmiths and jewelry merchants. Therefore, a roll back of excise duty on unbranded jewelry may be a desirable step.

Treating the import duty on gold and excise duty on gold jewelry, therefore cannot be treated similarly. Argument of the Finance Minister, while giving proposal to impose higher rates of import duties on gold was his apprehensions about constantly rising import of gold, imposing serious stress on our already strained balance of trade position. Finance Minister in his budget speech had said that in the last two quarters gold imports increased by more than 50 percent. Gold imports have surged to 15 percent of our total import bill.

In ancient times, India had the distinction to be the golden bird. In fact, there had been no major mining of gold in our country. India had been providing a minor part in world’s gold production. However, people in India possess more gold as compared to any other people of any other country. People in India buy gold jewelry, not as just ornaments. They purchase jewelry as insurance against the future risks and also as investments. There has been a tradition of borrowing against the security of gold.

Prior to New Economic Policy, there were severe restrictions on the import of gold into India. Gold Control Act was under operation. Even then lot of gold used to be smuggled into India. Under the New Economic Policy adopted in the 1990s, restrictions on imports of gold were removed and gold import was allowed after paying a nominal import duty. While the import of gold has already been significant, since 1990, in recent years it has witnessed tremendous growth. In 2000-01 the total imports of gold was worth rupees 18, 829 crore, it surged to Rs 154 347 crore in 2010-11, that is, 8.2 times. During this period, the gold price increased about 4.3 times, so if seen in terms of volume, imports of gold has almost doubled. Finance Minister has stated in his budget speech that between July and December gold imports in fiscal year 2011-12 grew by 50 percent, while the gold price had increased nearly 30 percent. This means that gold import has been growing tremendously in value, as well as quantitative terms.

We have been facing unduly high deficit in the balance of trade. Our trade deficit in 2010-11 has risen to US$ 130 billion. We find huge amount of foreign exchange outgo year after year, despite impressive growth in software exports and remittances from NRIs, as deficit in our balance of payments has reached US$ 44.3 billion. It may be interesting to note that gold imports in 2010-11 were US$ 34 billion and may reach US$ 50 billion. Heavy imports of gold are expected to increase our problems manifold. Growing balance of payments deficit has been worsening our situation in terms of foreign debt. Therefore it is imperative to impose effective restrictions on import of gold.

We find sudden spurt in the imports of gold and it has already doubled in the last 10 years. In India most significant use of gold is in making of jewelry. Should we assume that people in India have suddenly started wearing double jewelry than before? Perhaps it would be a wrong assumption. It is more related to the quantum of black money in the economy. There is a growing trend of keeping black wealth in form of gold. There may be several reasons for this emerging trend-
1. Formerly black money used to be kept in different forms - such as Kisan Vikas Patra, bank fixed deposits and real estate in benami names, and even currency notes, etc. Massive increase in stamp duty, TDS in case of bank deposits and tax authorities’ eye on all these forms of (black) wealth by using information technology and other means, have reduced the popularity of these types of black assets.

2. Gold is becoming an attractive asset also due to its growing attraction due to constantly rising prices. Gold prices grew 4.2 times in the last 20 years, whereas bank deposits would not have grown in that proportion. The price of gold per 10 grams in 1991 was only 3450, which increased to Rs 28,000 per 10 grams by 2011. Investment in gold is easy and advantageous due to rising prices.

3. There are different kinds of security risks in keeping black wealth in real estate and other forms, while huge amount of black money could be easily be kept in form of gold.

Beside sufferings of the common man due to the wrath of black money, rising gold imports is causing serious balance of payment related problems, like weakening of rupee, increasing burden of foreign debt and increasing dependence on foreign capital. The resources of the country are going into foreign hands. This trend must stop. It is imperative to impose effective restrictions on imports of all kinds, whether it be the import of Chinese goods, oil imports, or the import of gold.