Demand for gold

The government has taken a series of desperate measures to rein in the ever-burgeoning demand for gold in the country, which is posing a serious threat to the current account deficit position.

Finance minister P Chidambaram had warned earlier this month that India’s appetite for gold had the potential to turn the balance of payments problem into a full-blown crisis.

The Reserve Bank also had called for tighter fiscal measures to reduce gold imports into the country. The government has now acted on the warnings with a hike in the import duty of gold from 4 per cent to 6 per cent. The duty on platinum, another precious metal, has also been increased with the same objective. The duty hike is the second for the current fiscal year as it had been increased from 2 per cent to 4 per cent in the budget.

In spite of the sustained increase in the price of gold, the import of gold and its consumption have only been increasing in the country. While gold worth $ 43 billion was imported  in 2010-11, the import bill rose to $ 56.5 billion in 2011-12. The figures are showing an upward trend this financial year too. Gold imports account for about half of the current account deficit and therefore it is very important to reduce the quantum of imports. Since it is a completely unproductive asset and has only psychological value, it distorts personal and national investment plans and priorities. But it is doubtful if fiscal measures alone will have much of an impact on gold consumption.

It has been observed in the past that increases in the price of gold had only a temporary negative effect on demand. Long-term education is needed to change historically and culturally ingrained habits and to reduce the fascination that the yellow metal has for the people.
There is a danger that the duty hike and the consequent price increase may lead to the demand for gold being met by smuggling and havala operations.

During the first six months of the current fiscal the smuggled gold worth over Rs  50 crore was seized by the customs  against  Rs 15 crore during the same period last year. Steps should be taken to curb smuggling and black money operations relating to gold. Apart from the duty hike the government has also announced some steps to discourage purchase and hoarding of physical gold. These should ideally receive greater attention.

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