25 April, 2014 02:20 IST
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Gold import duty hike tackles the symptom, not the cause: Varma
Source: IRIS (22-JAN-13)
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The government raised the import duty on gold from 4% to 6% in order to check gold imports. We expect gold imports value to ease to USD 44 billion in FY14 from an estimated USD 48.3 billion in FY13, or a drop of 0.2% points.

``We expect the current account deficit to moderate to 4.3% of GDP in FY14 from an estimated 4.9% in FY13, remaining above sustainable levels, due to high oil prices and continued domestic supply-side constraints boosting import demand,`` said Sonal Varma, economist, Nomura. ``Gold demand has risen as a hedge against inflation. Therefore, we think imposing import duty will likely only shift gold imports from official to unofficial channels as it tackles the symptom, not the cause.``

Will this help curb gold imports and, if so, by how much?

``In the past, imposition of import duty has had some salutary effect in moderating official gold imports. In March 2012, the government doubled the import duty on gold from 2% to 4%. As a result, gold import volumes contracted by around 25% y-o-y during the first three quarters of 2012. In volume terms, we expect India's gold imports to fall to 855 mt (metric ton) in FY13 from 891 mt in FY12; and to USD 48 billion from USD 56 billion in value terms. The additional imposition of import duty could lead to gold imports moderating to 750-800 mt in FY14. However, we do not expect gold imports to fall much more than that as consumption demand for gold (around 65% of gold demand) and investment demand (35%) have already moderated close to their averages. Given India's penchant for gold for weddings and other religious ceremonies, a sharp fall in volumes is unlikely, in our view. With gold prices hovering around USD 1680/oz, we expect gold imports value to ease to USD 44 billion in FY14 from USD 48.3 billion in FY13, or a drop of 0.2% points.``

Will this help tame the current account deficit?

``Gold imports are not entirely responsible for the widening current account deficit (CAD). In FY13 (Apr-Sep), net exports of gold moderated to USD 9.1 billion from USD 25.1 billion in FY12, yet the current account deficit is likely to widen to a new record of USD 90 billion or 4.9% of GDP in FY13, in our view. While gold imports have fallen, higher oil prices, weak exports, flagging invisibles balance and inelastic demand for imports of coal, fertilizer and other commodities have led to a sharp rise in India's current account deficit. With exports likely to recover in 2013, we expect India`s current account deficit to improve but to remain around 4.3% of GDP in FY14, much above sustainable levels (of 2.5% of GDP), due to high oil prices and continued domestic supply-side constraints boosting import demand.``

``One of the reasons why households have a penchant for gold is that it has provided the best return among all financial instruments during a period of high inflation. Apart from high real returns, it is also the most liquid asset. Unless investors have options on other financial instruments, which provide an inflation hedge, we think import duties will only lead to a reduction in gold imports through the official channel and result in a simultaneous rise in gold imports through unofficial channels. Therefore, in our view imposing import duty tackles the symptom, not the cause.``

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