The government increased the customs duty on gold imports last week and with that the reduction made in the Union Budget 2021 stands cancelled.

In the Budget 2021, there was a 5 per cent cut in the gold import tax which took the duty down to 7.5 per cent. It’s now being brought back to the earlier level of 12.5 per cent. If the Agriculture and Infrastructure Cess (AIDC) is added, that was introduced in the last budget, the duty adds to 15 per cent.

Why duty is hiked?

Now, why did the government hike the duty? The reason is, India depends on imports when it comes to gold and given that the rupee is hitting new lows against the dollar, it can have a considerable negative impact on the trade deficit. In fact, gold is the second most imported item by India after crude oil.

According to the WGC (World Gold Council) data, the gold imports by India in calendar year 2021 zoomed to 1,003 tonnes as against 400 tonnes in the previous year. Moreover, as per the government data, the imports stood at 107 tonnes in May this year versus 11 tonnes over the same period last year.

If the demand for the precious metal goes up further, backed by the economic growth concerns, it can hit the trade deficit which already looks stretched. The preliminary data shows that the trade deficit stood at $25.6 billion in June 2022 compared to $9.4 billion in June 2021.

History

This is not the first time the government has touched gold import duty. In 2012 and 2013, when there were widening trade deficits, it was hiked.

Notably, before January 17, 2012, the duty was ₹300 per 10 grams. Effective January 17, the government levied Basic Customs Duty (BCD) at 2 per cent. It was increased to 4 per cent from February 28, 2012. Series of increases happened in 2013 and by the end of the calendar year 2013, the BCD stood at 10 per cent. It saw further hike to 12.5 per cent effective July 5, 2019. While it was slashed in the 2021 budget, it is now back to 12.5 per cent.

Independent demand

Higher import duty means the price in the domestic market will be at a premium. However, over the long run, the trend in price movement will be along with that of the international prices.

Also, looking at the import data, the hike in duty seems to have only a short-term impact. After the BCD was increased from 2 per cent in January 2012 to 10 per cent in August 2013, the gold imports dropped in 2013 to 960 tonnes compared to 975 tonnes in 2012, according to WGC data. However, it went up in 2014 (995 tonnes) and 2015 (1,065 tonnes).

The drop in demand was largely due to a decline in investment demand whereas the demand for jewellery and bars and coins went up as prices stabilised. According to AMFI (Association of Mutual Funds in India), the net outflows from gold ETFS in calendar year 2013 stood at ₹1,816 crore.

On the other hand, the jewellery consumption increased to 617 tonnes in 2013 versus 595 tonnes in 2012. Similarly, demand for bars and coins went up to 341 tonnes versus 319 tonnes in the corresponding period.

What next?

Going ahead, as in the past, the hike in import duty is expected to have a short-term impact and buyers of the precious metal are likely to be more concerned about the final price and not by its composition. Meaning, if the price drops from here, the demand can improve, even if the import duty is at the same level.

But it is worth noting that the impact can be bigger in monetary terms this time, and this could lead to more time for a recovery. That is because the price of gold by the end of 2013 was ₹28,422 (per 10 grams) (MCX futures price) whereas on Thursday it was around ₹50,650.

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