Gold import duty hiked to control current account deficit

In a pre-budget intervention, the government has increased import duty of gold to 6% to contain the precious metal’s import. Gold was the third largest import item for India during the last fiscal year, after crude and machineries. The present step became necessary because of the rising current account deficit.

Monthly trade data is one of the most disappointing one after the crisis year of 1991. Exports have registered a decline for the seventh consecutive month in November. Imports are rising, dominated by essential raw material and equipments and machineries imports. The latter two are unavoidable given their priorities on the production front. On the other hand, Gold import which was to the tune of US$56 billion in 2012; compared to the export revenue of $300 bn is an extravagance at this point.

The current account and balance of payment scenario are worsened by the trade situation. India was the third largest trade deficit country in 2011-12, after the US and the UK. Continuously rising import bill is causing depreciation pressure on the Rupee as well. The option in front of the government is to attract more foreign investment to fill the current account deficit. Allowing single brand Retail FDI and postponement of the GAAR by two more years were aimed to attract foreign investment. But despite such attempts capital inflows are not sizable to match government’s expectations. Hence, the option for the government is to control import bill. Deregulation of diesel and gold import duty hike are part of that.