Impact and Implications of Government Measures to Curb Gold Imports: An Analysis

The government has recently hiked the import duty on gold and platinum from 6 per cent to 8 per cent, the second increase in six months and the third increase in about a year. Import duty on gold which was 2 per cent in 2011 has been hiked to the current level of 8 per cent. This consistent increase in the import duty has been done with the objective of curbing rising gold imports which show no signs of abating. The burgeoning gold imports have imposed a severe strain on the government finances and has led to the current account deficit ballooning to 6.7 per cent during the third quarter of 2012–13. Globally the demand for gold which was primarily driven by rising central bank purchases has declined; however, the scenario in India is at a complete contrast. Though the government has been increasing the import duty from 2 per cent to 8 per cent and several measures taken to curb gold imports, imports have only increased raising concerns of widening current account deficit which is already at an alarming level. The study is conceptual in nature and the authors have applied descriptive research. A detailed literature review was conducted to explore the nuances of the topic and understand the views of experts and details of previously conducted research. The study is based on secondary data and the source of secondary data is information collected from business newspapers, journals and the website of the world gold council. Though the government expects that increase in the import duty and restrictions imposed on gold imports by banks and canalization agencies such as MMTC would reduce gold imports, the fact remains that in India, price is not the only factor influencing the demand for gold. Gold has been purchased in India not only for its investment value but also carries lot of sentimental value with gold ornaments being held to be passed on to the future generations. Gold demand can decline only if investors shift their investment preferences. For that to happen, awareness about the various other investment avenues has to increase and the regulatory framework has to be made robust in order to ensure that investors are not taken for a ride. The recent Sahara episode and Saradha chit fund scheme point out to the perils of financial sector investments. Therefore the government has to provide more powers to the regulators and take care to assuage the fears of investors in order to channelize savings to productive investment avenues.