The government is considering to further raise taxes on gold imports in a bid to tame the runaway current account deficit (CAD).
CAD stood at an all-time high of $22.4 billion for the July-September quarter (or 5.4% of the GDP, up from 4.2% in the year-ago period). High CAD could necessitate higher government borrowing, weakening the rupee and stoking inflation and higher interest rates.
“We may be left with no choice but to make it a little more expensive to import gold. The matter is under the government’s consideration,” said finance minister P Chidambaram.
Vedant Jatia, director of the Indian Institute of Jewellery, said, “If a higher tax on gold is levied, it would be automatically passed on to the end consumer. As a result, gold prices will shoot up by as much as the increase in import duty.” Kishore Narne, analyst at Motilal Oswal Securities, agrees. “The increase in prices will be effective from the day the increase in taxes becomes effective.”
Budgetary increase in customs duty has already helped lower gold imports from Rs1.40 lakh crore / 589 tonne in April-October 2011. Now, the government believes further taming of gold imports will help contain the CAD and boost foreign-exchange reserves. “I would appeal to the people to moderate the demand for gold,” said Chidambaram.