The government of India announced Monday that it is increasing the import duty on gold and platinum by two percent from four percent to six percent immediately, local news outlets reported.
The purpose of the measure to curb the amount of precious metals imported is to tackle the expanding current account deficit, which reached an all-time high of 5.4 percent of GDP in the third quarter. If gold imports moderate then the policy would be opened for review.
Arvind Mayaram, the Secretary of the Department of Economic Affairs, also told reporters that the federal government will connect the Gold Exchange Traded Fund (ETF) with the gold deposit scheme. This move will permit mutual fund investors to release their physical gold and invest in gold-linked programs presently offered by financial institutions. The minimum tenure will also decrease from the current three years to six months.
“It is difficult to establish the impact [of the tax] on the deficit and by how much it will come down, but there will be some moderation in gold demand,” said Mayaram. “The duties will be reviewed after some time if there is a moderation in the quantity of gold that is imported into the country.”
In the last fiscal year, gold imports totaled $56.5 billion.
Gold prices are projected to rise by 700 INR ($13.07) per 10 grams in the short-term.
India imposed a two percent duty increase last year – the Indian rupee dropped in the market as well – and there was only a temporary contraction in gold demand. Financial experts and analysts argue that the latest announcement will have very little effect on gold demands and the account deficit.
“The government’s revenue will increase, but imports won’t diminish,” said Mohit Kamboj, president of the Bombay Bullion Association, in a statement.
Furthermore, jewellers warned that the duty hike could increase retail jewellery prices by two percent, or 600 INR ($11.15), per 10 grams. They also warned that perhaps the rise in duty could lead to gold being imported using unofficial means, such as smuggling. However, Revenue Secretary Sumit Bose, who was at the press conference, said the government will observe illegal trading, but did not provide any details.
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