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The government has now raised the import duty on gold and platinum to 6 percent from 4 percent to curb the import of former.

22 Jan 2013

By Divya R Nair
The India government has struck again!

As gold importers around the nation go thermo-nuclear with import duties getting spiked from 4% to 6%, the question lingers with a creepy charm: “will India's appetite for gold diminish with this measure?”

“Demand for gold in India is price inelastic; Indian customers are not 'duty-conscious' when they buy gold. Though duty is a component in prices, customers are least bothered about the same when they purchase gold.” said Kishore Narne, Associate Director Head - Commodity & Currency,Motilal Oswal over phone.

“The jewellery demand growth is declining in the country but the investment demand growth is increasing.” he observed. As the price of gold appreciates, it is more appealing to invest in the same. But the prices having reached a peak deters investors from investing in the commodity as the risk-reward ratio is not attractive.” he said.

As the equities and other asset classes are yet to realise their potential, they yield more in rewards, compared to the risks they present.

Given the cultural aspects, India's appetite for gold has never gone down.

But presently the passion for gold has led to an all time high current account deficit of of 5.4 percent against GDP in the July-September quarter even as share of gold in India's import bill is 11.5 percent.

Gold imports next to that of crude oil is adding to the CAD.

The government has now raised the import duty on gold and platinum to 6 percent from 4 percent to curb the import of former.

The import duty hike will make gold costlier and government expects that the high price will curb the demand. Bombay Bullion Association in November estimates that India's gold imports have fallen by as much as 42-45 percent in 2012 to around 532 tonnes after the doubling of import duty on gold.

And importers have their grievances:

“The government's move to hike the customs duty from 4 to 6 percent will have a loud impact on the Bullion sector. The hike sums up to around INR 60,000 (approx) per kilogram of gold. To be clear, with this duty hike a difference of 7 percent between the international and domestic price of the yellow metal is evident,” said Prithviraj Kothari, Managing Director, RiddiSiddhi Bullions Ltd; one of India's biggest importers of gold.

“This may lead to rise (of) illegal channels and malicious activities with respect to importing gold and related products like jewellery etc., in the country. In turn it will lead to an increase in unemployment among the skilled artisans of the country (around 1-2 million people depend on this sector to earn their livelihood) as well (as negatively impact) the businesses of local jewellers across the country.” he said.

His suggestion is to unleash the latent potential of gold in the country.

“The government should harness the existing reserves of gold in our country rather than turning towards imports and implementing this alarming hike on customs duty. Also other opportunities for revenue generation, like increasing exports should be explored by the government of India. Hiking the duty on imports will in no way, curtail the demand, as the precious metal has always been regarded as one of the best investment options for social security,” Kothari added.

Gold will continue to colour the dreams of aam-aadmi Indians and there are little signs that this would be met by hiking of import duty in the yellow metal. Meanwhile importer grievances should also be taken into account.

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