Reviewing import duty on gold from time to time, allowing banks to buy back gold coins and imposing export obligation on importers are among a host of suggestions made by a central bank panel to manage gold demand.
The final report of the Reserve Bank of India’s working group to study the issues related to gold imports and gold loan non-banking finance companies has recommended revisiting fiscal measures to reduce gold imports.
Last month the Government had upped the Customs duty from 4 per cent to 6 per cent on gold imports to moderate demand.
The group said import duties on gold imports will have to be reviewed from time to time to dissuade gold imports as warranted by evolving Balance of Payments (BoP) situation.
BoP is a record of all transactions of a country with all other countries during a specified period of time. It is an indicator of economic and political stability.
The group said: “While sharp increase in import duties is counterproductive, a well-modulated increase in import duty may reduce the demand.”
When the external sector situation is deteriorating, the group suggested raising import duties.
When the external situation eases to a sustainable level a review of the hiked import duties may be undertaken.
Buy-back of gold
To reduce the demand for gold imports and recycle the domestically available gold (estimated at 18,000-20,000 tonnes), banks may be permitted to buy back gold coins from the public by offering buy-sell quotes.
Further, the group said banks could be allowed to use the futures markets to hedge risks in bulk gold purchases.
To contain gold demand, the group recommended differential pricing of banking services and finance for gold imports.
These could include stipulation of high cash margin on opening letter of credit for import of gold and imposition of surcharge on interest on gold metal loans to domestic jewellery manufacturers.
The group felt that entities importing bulk gold through banking and non-banking channels could be asked to have an export obligation based on a certain percentage of imports of the gold.
The aforesaid recommendation comes in the backdrop of the share of gold re-exported with value addition from the country as a proportion to gold imported declining steadily.
The RBI group observed that while all investments in financial savings instruments are recorded and lead to a clear trail for tax purposes, investment in gold generally eludes such tax traps.
No one really knows how much gold or gold ornaments an individual possess. Similarly, it is assumed by the investors that there is no need for paying any capital gains tax on the deals and no irritants like tax deducted at source during the sales and purchases of gold.
Though the current rules stipulate that permanent account number has to be given beyond a limit of Rs 5 lakh for ornament purchases, the group said many jewellery shops flout that norm with impunity.
Hence, there is a strong need for plugging these loopholes to increase transparency in gold deals.
Gold-backed products
The group said the policy challenge is to invent and introduce gold-backed financial products sooner than later to reduce the demand for physical gold.
These products should be such that they can fetch real effective interest rates (adjusted for inflation) that can match returns on gold with adequate liquidity.
Ramkumar.k@thehindu.co.in