India has been trying to reduce its massive current account deficit, which has ballooned sharply due to the massive misdirected fuel and fertilizer subsidies. However the government is holding the huge gold imports responsible for this deficit and had raised the duties on gold imports to 4%. Note India had very high duties on gold imports before 1990s. Gold smuggling was a lucrative trade helping the growth of the Mumbai mafia especially notorious gangster Dawood Ibrahim. The 1990s reform freed the trade in gold allowing free imports of this precious metal. Gold smuggling disappeared as a result of these reforms. Indians are voracious consumers of gold products and jewellery; and high duties will not deter this demand. The only beneficiaries will be gold smugglers and criminals who will benefit from the transfer of money from honest gold buyers. Gold buying has increased in recent times as inflation has stayed stubbornly high in low double digits thanks to economic mis-governance. Instead of correcting its misdirected policies, the government is compounding its problems by increasing the duties by 50%.
We think that with this increase, India’s deficit problem might increase instead of decreasing. This will happen as people evade taxes in importing gold, which will reduce the governments’ tax and custom revenues. This will also increase the already huge black money economy and hurt the honest citizens looking to protect their savings from high inflation.
India on Monday hiked import duty on gold to 6 percent from 4 percent effective immediately, a finance ministry official said on Monday, in a bid to cut down ballooning current account deficit. The news sent gold futures higher by a percent. The duties will be reviewed if there is a moderation in gold imports.
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